However, there are some parts of the commercial property sector that appear to be performing quite nicely despite the cloudy outlook in the wider market. One of these playing catch up with demand is commercial warehousing. In the wake of the financial crash there was virtually no new build, and although supply is starting to accelerate, there is little evidence to suggest that it is catching up with demand, which is also on the rise. This imbalance has percolated through to rental growth, which is currently nearly three times that seen in the broader property market. According to international property consultants Gerald Eve, a record low of just 5.9 per cent of the total warehousing stock was available for letting at the end of 2016. The flip-side to this is that warehouses are quicker to build than offices or houses, and development starts of around 20m sq ft are the highest since 2007. Despite this, it is reasonable to suggest that rental growth will continue to outpace the broader market unless supply catches up with demand, which doesn’t seem likely for another couple of years.
The appetite for more space comes as a result of a change in consumer buying habits and a subsequent explosion in online sales. Year-on-year growth up to May 2017 was 14 per cent, and sales now account for 15 per cent of all retail sales. Shops such as Primark need distribution centres to cater for such services as same-day delivery, and the online business needs to build a spider’s web style of centres much in the same way as the old GPO used to have from large holding warehouses all the way down to ‘last mile’ distribution centres. One worry is that there is a strong correlation between household spending growth and the growth of industrial rents. With GDP growth slowing sharply in the first quarter of this year, and rising inflation eating away at disposable income, it could be argued that online sales are under pressure. However, it is also possible that overall spending will contract but the percentage of that coming through online sales will continue to rise.
There was a brief dip in industrial occupier demand in the wake of the referendum, but this has since been reversed. In fact, according to the Royal Institution of Chartered Surveyors, occupier demand balances had all recovered from their post-vote lows with the exception of the south of England. RICS also showed that the net balance of surveyors reporting rising availability remained on the negative side. In 2016 as a whole, take-up rose by 16 per cent from the previous year, with online retailer Amazon taking around 17 per cent of the total on its own, according to Capital Economics.
All the potential for rental growth could be derailed if the economy slides into recession or there is some other macroeconomic shock. But at the same time, the economy has so far shown itself to be more resilient than previously expected directly in the wake of the referendum. And as the terms and conditions of leaving the EU become clearer and steer away from a hard exit, there is scope for the pace of economic growth to accelerate.
Buyers have also been active in the commercial property market in central London. And despite the general election and all the hype over Brexit, investment in the first half of 2017 saw contracts exchanged totalling nearly £9bn; that’s up 18 per cent on the first half of 2016. Nearly half of the interest has come from Hong Kong, China and Singapore, making the first half the most active for Asia Pacific investment in central London for five years. Items snapped up included the Leadenhall ‘Cheesegrater’ building, 20 Gresham Street and 67 Lombard Street. And contrary to popular perceptions, German investors were also busy, albeit on a smaller scale. Of the seven deals valued at more than £200m, four involved European buyers, three of which came from Germany. In fact, overseas owners now own nearly 30 per cent of UK investment property, and that includes 16 per cent of all commercial property compared with 17 per cent and 9 per cent respectively in 2007.
