Member Article

Improving economy stimulates development

Developers are now responding to the improving economy says Oliver du Sautoy, associate, commercial research, Knight Frank.

The upward trajectory of the UK economy continues apace. Latest official figures reveal that the economy expanded by 0.8% in Q2 2014, marking a sixth successive quarter of robust growth and taking output back to its pre-recession level. In July, the IMF also revised its forecast for UK GDP growth to 3.2% in 2014, the strongest of all the G7 nations.

With relevance to logistics occupiers, UK Distribution & Retail has been one of the strongest performing sub-sectors of the economy, recording year-on-year growth of 4.9% in Q2 2014, compared with 3.1% for the UK economy as a whole. Encouragingly, UK manufacturing is also now recording consistent growth, although the recent strengthening of sterling does pose something of a threat to UK exports.

The Midlands was the main focus of pre-commitment activity in the first half of this year (H1) followed by the wider South East region, with 3.0m sq ft and 1.3m sq ft sq ft respectively.

The shortage of good quality standing stock has become an enduring theme which now stretches the length and breadth of the UK. However, the situation is most acute in the wider South East and Midlands regions, the latter of which has only six months’ worth of supply now available following a stellar 6.6m sq ft of take-up in first half of this year.

The next step for the market is headline rental growth. We have already seen rents reach new highs for particular unit sizes in the tightest markets during H1 and we expect this to become more widespread over the coming 12 months. In turn, evidence of rental growth will give the green light for developers to bring further speculative development forward, albeit the focus is likely to remain in the South East and Midlands over the next 12 months.

Reflecting improving confidence in the occupier market, total UK-wide take-up in ‘Big Shed’ units above 50,000 sq ft was a commendable 22.2m sq ft in H1 2014, up 17% on H2 2013 and 22% above the five-year bi-annual average. Bespoke deals amounted to 5.0m sq ft.

The Distribution and Retail sector has, for the first time in five years, seen the commencement of a number of speculative schemes with those in excess of 50,000 sq ft increased by 80% during the period to stand at 1.53m sq ft across 10 schemes.

All of these developments are located the wider South East and Midlands regions. Developers remain much more reticent to progress schemes speculatively elsewhere in the UK’s other regions, where sites continue to be primarily marketed for design and build solutions.

The restricted choice of accommodation in the market means that landlords now have the upper hand. Incentive packages have moved in sharply across all regions and this has subsequently been followed by a lengthening of lease terms.

ENDS

This was posted in Bdaily's Members' News section by Knight Frank .