Experts predict ‘exciting year’ for commercial property

CAPITAL values will show strong growth in 2014 while overseas demand is set to continue, according to latest forecasts.

The predictions are part of Deloitte Real Estate’s top trends for the commercial property industry over the year ahead.

Deloitte has said the UK economy enters 2014 in far better shape than at the start of 2013 and is now on track to see the strongest year of growth since 2007.

On average, economists forecast the UK will grow by about 2.5% in 2014.

Against this more positive backdrop, Deloitte Real Estate says capital values will continue to show strong growth over the first half of 2014, as investors remain firmly in buying-mode and become increasingly comfortable about a move up the risk curve.

Overseas demand will remain significant, with the current wave of Far Eastern investors being joined by new entrants such as Taiwanese insurers.

Angela Barnicle, assistant director of Deloitte Real Estate in the Yorkshire, said: “It is clear that the flow of overseas capital is not slowing. Indeed, it will continue to be reinforced by new investors from geographies yet to buy into UK real estate in any significant way, but with an appetite to increase their exposure.”

Strong activity is being seen within the construction industry, where signs of an impending spike in construction costs are becoming increasingly apparent.

Barnicle said: “With construction activity now growing and expected to rise further as economic conditions improve, contractors are becoming more selective about which jobs they take on and the price at which they commit to delivering. We expect that this will soon translate into an upwards shift in the overall construction cost index as margins return to a more ‘normal’ and sustainable level. This will be seen first in the early stage construction processes such as demolition, groundwork and concrete trades, as well as in the smaller, complex jobs that are less attractive to contractors. However, following the sharp correction we are predicting for early 2014 it is likely that the market will return to a more normalised period of cost price inflation.”

Deloitte’s predictions highlight the potential for an improving outlook for the high street in 2014. It also covers the implications of the rapid growth in e-commerce on demand for urban logistics facilities. The interplay between online and physical retail continues to evolve, and is creating a new set of challenges for retailers.

Barnicle continued: “Many of the UK’s retailers and e-fulfilment specialists are now acutely aware of the need to compete effectively on delivery times, and that this often means a requirement for urban distribution hubs. Demand for smaller, urban warehouses is therefore only set to build as online operations escalate and pressure on delivery times intensifies. The supply of well-located stock is likely to be far from sufficient, so we expect to see rents on such property rising, and yields being forced down, in 2014.”

The report also focuses on the growing recognition amongst businesses that carefully aligning talent, technology and workplace strategies is becoming increasingly fundamental to attracting and retaining staff, and supporting talent agendas.

Barnicle concluded: “2014 will not be without its share of hazards. Rental growth will need to pick up if the high level of returns predicted for the first half of 2014 is to be maintained, while a rise in construction costs will put pressure on development viability.

“Nevertheless, with an optimistic economy, new overseas investors adding momentum in the transactions market, and a number of structural changes taking place – 2014 is shaping up to be an exciting year for commercial property.”