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21 / November / 2019

Property Market Overview: Q3 2019


The UK economy managed to avoid a technical recession in Q3, GDP grew by 0.3% during the three months to September, following a 0.2% decline in output in the second quarter. The services and construction sector both delivered positive output over the period of 0.4% and 0.6% respectively, while the manufacturing sector flatlined. Even so, a slew of weaker readings on the domestic economy suggests that the underlying pace of economic activity will be subdued in the final quarter. The All Sector Output PMI, a lead indicator for GDP growth, fell for the second consecutive month to 48.8 in September after two of the three key indicators, while the services and construction PMI both contracted over the period.  

The labour market, which has remained remarkably resilient since the 2016 EU referendum, cooled in the third quarter. The number of people in employment fell by 58,000 to 32.69 million during the three months to September which caused the employment rate to slip by 0.1 percentage point to 76.0%. The number of job vacancies also declined with 18,000 fewer job vacancies recorded for the three months to September than for the same period to July.

September’s retail sales data also raised concerns that weaker business sentiment driven by the general uncertainty around Brexit may have started to affect households. According to the ONS, the value of retail sales declined by 0.2% over the month to September, while the quantity of goods bought flatlined. The figures were better than those recorded by the British Retail Consortium’s BRC-KPMG Retail Sales Monitor, which reported a 3.2% decline for in-store, non-food retail sales for the three months to September.

At least inflationary pressures remains contained, the annual rate of CPI slowed to a three year low of 1.5% in October, from 1.7%yoy in September. The energy price cap which came into effect in August of this year was a key contributor to October’s lower reading and was responsible for a 4.4% decline in energy prices over the month to October. Additional downward contributions came from a decline in the price of furniture and household equipment, which offset the increases in the price of clothing and footwear.

Further afield, trade wars and a synchronised slowdown in global economies is creating more challenging trade conditions. Trade tensions between the US and China have escalated. According to Oxford Economics, average tariffs between both economies have risen from c.3-8% at the beginning of 2018 to c.20% currently and has amounted to a 15% reduction in US-China bilateral trade over the year to date. The impact of the trade wars on the UK economy has been reasonably small to date, given that most the UK’s trade is to the EU, but with demand from the Euro area dwindling as the Eurozone edges closer towards a recession, net trade is expected to negatively contribute to growth in the near term.

But by far the greatest risk to the UK’s short-term growth prospects is a no-deal Brexit, which according to most economists’ forecasts could see the economy contract by anywhere between -1 to –3% in 2020. Two key political developments occurred shortly after the quarter end: the EU agreed to the Prime Minister’s request for an extension of the Article 50 period to the 31st of January 2020 and Members of Parliament finally agreed with the Prime Minister’s proposal to hold a general election on the 12th of December. At this point in time, all Brexit scenarios: deal, no deal, continued delays, or a revocation of Article 50 remain a probability.


The commercial property market delivered relatively stable performance over the quarter, despite the weaker conditions in the retail markets and slowing investment volumes. According to the MSCI Monthly Index, All Property total returns were 0.6% for the three months to September, which was identical to the quarterly return recorded in June.

Performance continued to diverge by sector; retail rental and capital value declines accelerated over the quarter, which caused the All Retail total return to slip to –1.5% in Q3 from

–0.9% in previous quarter. The Other Commercial and Industrial sector delivered more stable performance over the period, with the former returning 1.5% for the quarter (up from 1.4% in Q2) and the latter delivering a total return of 1.7%, which was unchanged from the previous quarter. The office sector recorded the biggest positive change in performance this quarter, the three month total return rose from 0.9% in June to 1.4% in September. Most of this improvement was driven by City Offices which recorded an 100bps improvement in total returns (1.8% in Q3, compared to 0.7% in the previous quarter).

It was another positive quarter for the Central London office occupier market. Vacancy rates ticked down to 4.1% in Q1, from 4.2% in June, and take up rose by 11% to 3.4mn sqft pushing the quarterly figure ahead of its 10 year quarterly average of 3.3mn sqft according to CBRE. Industrial demand also remained buoyant, according to JLL, 6.6mn sqft of space was taken up in the big box market in the third quarter. Just under half of this, 2.9mn sqft, was through one lease transaction, Appleby Magna to Jaguar Land Rover.

Continued political uncertainty, a lack of deals and investor aversion to the retail sector suppressed transaction volumes in the third quarter. According to Colliers, the value of commercial property deals totalled £3.3bn in September, down from £3.8bn in August. The office and alternative sectors recorded the greatest share of volumes, totalling £1bn and £944m respectively for the month, but the industrial sector delivered the greatest improvement, with investment volumes doubling from £306m in August to £631m in September.

Our projections for UK property remain unchanged over the quarter, we forecast c.1% total returns for All Property both this year and next, followed by more respectable income driven total returns from 2021 to 2023. Convenience retail, offices in major cities and standard industrials are expected to deliver the best risk-adjusted total returns over the forecast period.