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30 / July / 2019

Economic and Property Overview: Q2 2019


There is growing evidence to suggest that the UK economy slowed in the second quarter, the ONS recorded a 0.3%m/m rise in GDP in May, which partially reversed the 0.4%m/m contraction in April. The upturn in the monthly rate was driven by a recovery in car production which declined by 45% in April after factories temporarily shut down production around the original Brexit date. Output moderated across other major industries too; construction output grew by 0.6% over the month, but the service sector, which accounts for c.80% of GDP, flatlined in May. As a result, the three month rolling rate eased to 0.3% in May, compared 0.5% in Q1.

Official data on the UK labour market remains solid: the number of people in employment rose 28,000 over the three months to May, the unemployment rate held firm at 3.8% and salaries, including and excluding bonuses rose by 3.4%yoy and 3.6%yoy respectively. However, other forward looking measures of employment growth suggests the market could be nearing the peak of its cycle. The number of people hired for permanent jobs contracted for the fourth month in a row in June according to the recruitment industry group, REC, and hiring intentions, as measured by the BDO Employment Index fell to a 12 month low in June. The corporate sector is also feeling less optimistic; according to the latest Deloitte CFO survey, the majority of CFO’s (62%) expect to reduce hiring over the next three years.

Consumers turned more cautious in June and spent less in the shops despite summer sales starting earlier this year. BDO’s high street tracker recorded a 0.8% decline in high street retail sales in June compared to the same period a year earlier. The data was consistent with a separate survey by the British Retail Consortium which reported a 0.6% fall in retail sales growth for the 12 months to June.

At least inflationary pressures remain controlled, the annual rate of CPI inflation ticked down from 2.1% in April to 2.0% in May, meeting the BOE’s target for the first time since December 2013. A decline in transport costs, prompted by lower airfares and a drop in car prices, offset price increases elsewhere. Core CPI, which excludes more volatile components such as energy and food prices also softened to 1.7% in May.
The latest business sentiment survey data suggests that the current slowdown could persist in the near term. June’s IHS Markit/CIPS Purchasing Managers' Indices (PMI) for the construction and manufacturing sector fell to 43.9 and 48 respectively in June, as Brexit-related uncertainty and sluggish global growth weighed on demand. The services PMI also dropped to 50.2 in June, within a whisker of the 50 mark that signals expansion. The overall composite score now stands at 49.2 for June from 50.7 in May; June’s figures suggest that the UK economy could contract in Q2.

Limited inflationary pressures and slower growth should give rise to more accommodative monetary policy conditions in the short term. Rates were left unchanged at 0.75% in June, but policymakers were more dovish at June’s MPC meeting. The committee warned of escalating global trade tensions and the growing risk of a no-deal Brexit under the new conservative leader. In a separate meeting, the BOE governor Mark Carney announced that the next move in interest rates could be in either direction. Financial markets remain unconvinced of further interest rates hikes in the short term and have now pricing in more than a 50% chance of an interest rate cut this year.


Challenging conditions in the UK’s retail markets continued to reduce commercial property returns in Q2. The All Property total return was 0.63% on MSCI’s Monthly Index for the three months to June, down from 0.67% for the same period a month earlier. All Property capital values declined by 0.7% over the period, while income returns held steady at 1.3%. In contrast to the previous months, the decline in capital values was broad based in Q2, with all segments apart from South East Industrials and the ‘Other’ category delivering negative capital returns. The retail sector witnessed the largest capital falls in Q2, with values down 2-3% across the retail segments, compared to an average of –0.2% across the other non-retail segments.
CVA’s and store closures were a key feature of the retail market in Q2; the Arcadia Group narrowly avoided administration after a rescue package was agreed between the group’s creditors and landlords, which included the closure of 50 of its stores nationwide. Monsoon / Accessorize’s CVA was approved shortly after the quarter, with proposed rent cuts of up to 65% on more than half of its stores including its destination stores on Oxford Street and Westfield’s shopping centres. Boots announced the closure of 200 of its stores, and the footwear retailer Office Shoes are also exploring options to restructure their business, according to Property Week.

Occupational conditions across other market segments was more positive in Q2, the Central London office market saw a 10% increase in take up in Q2 and a 5% decrease in the amount of available office space, which reduced the vacancy rate by 10bps to 4.2%. The industrial market also remains in good health; logistics take up rose from sub 5mn sqft in Q1 to 8.12mn sqft in the second quarter, according to CBRE.

Investment market activity remained subdued at the start of the quarter; the value of commercial property deals totalled £2.3bn in April, down 40% over the month. Most of the traditional property sectors saw a deterioration in investment activity, with the retail sector being the only exception; the total value of retail deals was boosted in April by the sale of 12 Sainsbury’s superstores by British Land to a US property investment company.

We are forecasting a fairly subdued outlook for UK property for the rest of the year, with total returns shy of 1% for this year and next, and c. 4% total returns for 2021 onwards. Convenience retail, offices in major cities and industrials will offer the best prospects over the forecast period (2019-2023), outperforming the market by 1%p.a. or more.