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23 / March / 2020

Economic and Property Overview: Q4 2019


The UK economy flatlined in the final quarter of 2019 as declines in manufacturing sector output offset positive growth from the construction and services sector. Relative to the same quarter a year ago, economic output grew by 1.1%, which represents the weakest annual growth rate since mid-2012. However, a post election bounce back in business confidence should provide some upside to economic activity in the first half of 2020. The composite score on the IHS Markit/CIPS UK purchasing managers index (PMI) climbed to 53.3 in January from 49.3 in December. 

CPI inflation slipped further away from the BOE’s 2% target in December, the annual rate of growth fell from 1.5% y/y in November to 1.4%y/y in December. Slower growth in restaurant and hotel prices, clothing, food and alcohol were key contributors to the reduction in the headline rate.

After a brief stint of weak performance in Q3, the UK labour market regained its composure in Q4. An increase in the number of people in full-time employment raised total employment by 180,000 to 32.9 million in the three months to December, while the unemployment rate fell by 0.1% over the quarter to 3.8%, its lowest level since 1974. The recent employment gains had little effect on earnings growth though; the growth in total pay slowed to 2.9%y/y for the three months to December, down from 3.2% a month earlier.

Improving labour market conditions, moderate inflation and the discounting of goods following the Black Friday and Boxing Day sales failed to persuade consumers to spend on the high street. The Office for National Statistics recorded a 0.6% fall in the volume of retail sales in the month to December. The figures defied economists’ forecasts and was out of step with the bounce back in the GfK consumer confidence indicator in December. Clothing and footwear stores, department and food stores witnessed the largest declines in retail sales, with the volume of goods bought falling by –2.0%, -1.8% and –1.3% respectively. The growth in online retail sales remained strong however, with internet retail sales increasing by 1.6%m/m in December and by 5.6% for the year as a whole.

With the economy slowing, inflation down and consumers hesitant to spend, expectations of an interest rate cut have grown. Two of the nine MPC members voted for a 25bps rate cut in December’s MPC meeting, with several other members taking a dovish stance.  Financial markets are now pricing in a 37% chance of an interest rate cut in May, but with business sentiment strengthening and the UK’s fiscal position set to expand in the near term, the chances of a rate reduction in May looks slim.



Challenging conditions in the retail market continued to dampen commercial property returns in Q4. The MSCI Quarterly Universe All Property total return slowed to 0.0% in the final quarter of 2019, compared to a 0.3% total return in Q3. Capital value declines in the retail sector picked up pace in Q4 and declined by 4.2% versus –2.9% in Q3, resulting in a 1.1% decline in All Property capital values in Q4. All Property income returns remained stable at 1.2% for the quarter.  For the year as a whole, UK property delivered a total return of 1.2% significantly underperforming the performance of UK bonds and equities of 11.5% and 19.2% for 2019 respectively.

It was another tough quarter for the retail occupier market, vacancy rates continued to drift upwards and several retailers including: Game, Debenhams, Ted Baker and Jigsaw either announced store closures, called in their advisers to review their current liabilities or demanded rent reductions from landlords. Yet, despite the turmoil, the sector’s performance remained polarised; out of town Shopping Centres delivered a –5.6% total return for the quarter, retail warehouses recorded –3.9% and supermarkets posted another quarter of positive total returns (1.1% in Q4).

Encouragingly, the performance and occupier conditions of all non-retail market sectors remained resilient in Q4. According to data compiled by CBRE, Central London office take up was up 4% to 3.6m sqft in the last quarter of the year and a decline in office availability caused Central London office vacancy rates to fall marginally to 4.0% for Q4. Q4 data releases on the industrial market remain light, although CBRE recorded a slight fall in logistics take up over the quarter from c.7m sqft to 5.4m sqft. Even so, MSCI’s All industrial total return improved over the quarter from 1.6% in Q3 to 1.7% in Q4.

Investment activity improved in December following the General Election outcome, according to PropertyData, commercial property investment volumes totalled £9.4bn in December up from £3.2bn in November. The office sector saw the biggest bounce back in transactions volumes, up from £856m in November to £3.3bn. The alternative sector also remained highly sought after and accounted for the largest share of total transaction volumes in December (c.36%).

Near term prospects for the property market are expected to remain weak, we expect an All Property total return of –0.1% for 2020 as income returns are offset by a further depreciation in capital values. However, the outlook should improve as the repricing of retail assets moderates from 2021 onwards. We predict c. 5% total returns from UK property in 2022 and 2023, resulting in sub 4%p.a. total returns for the entire period. On a sub-sector level, regional offices, industrials and the leisure sector are expected to deliver the best performance over the forecast period.