Back at the beginning of 2014 and out of a really mixed bag of tea leaves Colliers International property market analysts promised "an interesting year", writes Peter Gallagher.
We predicted a year of slowing global growth, a push by investors into second-tier cities in search of value and the European economies emerging from recession. We reasoned that property investment transactions fuelled by increasingly scarce product and the intense competition generated would see lower still yields in London and yield compression across many secondary markets.
On the occupational agency side, we foresaw UK consumer confidence and economic recovery strengthening, the consequent increase in business confidence and rental growth UK wide. Here in the North West we saw a gradual improvement in office take-up in the city centre and south Manchester suburbs.
Twelve months on and despite pressures from within the rest of the eurozone and further outside the UK weighing heavily on business activity, the year closes with the UK remaining on track to be the fastest growing G7 economy. The equity markets have seemingly shrugged off world volatility and the volume of property investment transactions in the North West is expected to exceed pre-recession levels at in excess of £3.4bn.
Take-up of offices in Manchester city centre is expected to be around 1.2m sq ft in 2014, growing by 36% in the year from the end of 2013 and a staggering 50% from the total recorded in 2013. Grade A office asking rents, which were stuck for some time at around £30/sq ft, have moved through £32/sq ft.
Expect rents to accelerate
Our forecast for the next 12 months is bullish and will build on the confidence of 2014.
The new Co-operative and Hermes development partnership at NOMA launches into the mainstream early in 2015, as a speculative start on the 90,000 sq ft re-modelled Hanover and place-making work around the new public square opposite Victoria station commences.
The first part of the year will be punctuated by the signing of a number of large city centre office pre-lets, encouraging a string of further speculative development starts. The shortage of good quality built office stock will continue and we expect rents to quickly accelerate next year as the expected flurry of forward commitments pushes at pipeline availability.
Whilst London continues to retain a special place in investor portfolios, Manchester will continue to demonstrate the healthiest environment for rental growth across all major UK regional commercial centres, and cement its standing as a truly global player. In fact, we estimate average growth of 4.1% each year over the next five years, which would see prime Grade A office rents at around £40/sq ft by the end of the decade.
Demand for large 100,000 sq ft plus industrial premises across the North West will remain in excess of the built supply resulting in real rental growth across the sector for the first time in two decades. Continuing take-up of a diminishing supply of good quality units of 50,000 sq ft will reactivate long dormant industrial redevelopment activity.
Investors will continue in the chase for yield, looking outside of the office sector. Debt is back as a market driver and as a result we'll see investors move higher on the risk/reward spectrum.
Peter Gallagher is director of national offices at Colliers International in Manchester