slower growth in 2018 but commercial market remains...

Economics

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Slower Growth In 2018 But Commercial Market Remains Firm

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Q1 2018

UK Economy and Property Market Chart Book

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2 © RICS Economics 2017 Q1 2018

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2



ContentsEconomic outlook................................................................................4

UK Economy.......................................................................................5-6

Housing market..................................................................................7-8

Commercial property sector.............................................................9-10

Construction sector.........................................................................11-12

Market surveys and reports................................................................13

RICS Survey Release Dates

Frequency Survey Period covering

Release date

Monthly RICS Residential Market Survey January 08-Feb-18

Semi-Annually RICS Rural Market Survey H2 2017 13-Feb-18

Monthly RICS Residential Market Survey February 08-Mar-18

Monthly RICS Residential Market Survey March 12-Apr-18

Quarterly RICS Construction Market Survey Q1 2018 18-Apr-18

Quarterly RICS UK Commercial Property Market Survey Q1 2018 26-Apr-18

Quarterly RICS Global Commercial Property Market Survey Q1 2018 26-Apr-18



Economic outlookThe economy ended 2017 on a relatively firm note if the prelimary estimate for GDP covering the final three months of the year is to be believed. However, it remains to be seen whether this more positive trend can be sustained over the coming months with most forecasts still pointing towards a more anaemic performance as households continue to grapple with a squeeze on their purchasing power. A key factor underlying the challenge for consumers is the acceleration in headline inflation which reached a five year high of 3.1% in November 2017 and remains just below that level currently. This has been driven upwards by the jump in import costs on the back of the depreciation in sterling last year. More recently, the currency has retraced some of its losses but this has yet to filter through into lower prices. Meanwhile, there has been little evidence that wages are responding to what on the face of it appears to be a tight labour market, Unemployment now stands at just 4.3%, its lowest level since 1975; over the past twelve months, it has declined from 4.8%. Yet official data on growth in regular pay has barely budged and remains stuck in the 2 to 2.5% area (on an annual comparison). Against this backdrop, it is perhaps not surprising consumer confidence has slipped to its lowest level since 2013.Alongside this, uncertainty linked to both Brexit negotiations and the political environment are clearly weighing on business sentiment. This has manifested itself most visibly in corporate capex which has been lagging some way behind the firmer trend in profitability. Significantly, there seems little prospect that either of these headwinds will fade anytime soon. This is evident in the feedback to the latest RICS Commercial Property Market Survey; while less than one-fifth of respondents indicate that they have already received enquiries from firms looking to relocate away from the UK in response to Brexit, this is expected to

more than double over the next two years.Notwithstanding these challenges, one reason why the UK economy could do rather better than expected over the course of this year is the improving global economic climate. The IMF recently described it as ‘the broadest synchronized global growth upsurge since 2010’ noting that there have been ‘notable upside surprises in Europe and Asia’. This, coupled with the still competive currency, has the potential to drive a further upswing in the export performance.For the time being, the Bank of England appears in no rush to add to the first hike in interest rates in a decade that it sanctioned in November. Although inflation remains well above the 2% target, there is a suspicion amongst policymakers that it is more likely to gradually soften than accelerate any further. Moreover recent speeches from members of the key decision making committee highlight concern about some of the macro indicators. In view of this, it is not altogether surprising that money markets are currently only betting on one more round of monetary tightening over the remainder of this year.As we have noted in the past, it is hard to talk about THE housing market as a single entity although this is the way so much of the narrative is conducted. For what it is worth, the RICS Housing Market Survey suggests that momentum has softened over the past few months with activity indicators on demand and supply negative and the price trend flattening. But this summary of results masks significantly divergent trends at a more local level. For example, the Newly Agreed Sales indicator is showing rather greater resilence away from London and the South East and the Price series is actually still strongly positive in Wales, Scotland, Northern Ireland, the North West and parts of the Midlands.In the last survey, we did probe contributors as to the likely impact of the change in stamp duty that

was announced in the Budget. Almost nine-tenths of respondents across the UK as a whole said they had seen no immediate increase in first time buyer enquiries. Moreover, around two-thirds anticipated the change having little impact in the coming months while just 12% believed it would lead to a rise in overall activity. That said, the results for the capital were a little more encouraging. As regards commercial property, both the feedback to our survey and most other insight suggests the investment side of the market seems to be holding up better than the occupier side. The industrial segment, not surprisingly, continues to lead the way with robust rental and capital value gains projected for the coming year. The contrast to this is visible in the the woes being encountered by parts of the retail sector. Poor Christmas sales were highlighted in the trading statements of a number of familiar high street names with this reflected in the forward looking indicators (in the RICS Commercial Property Survey) particularly for secondary retail space. Significantly, demand from overseas buyers continues to rise steadily across the country with London still viewed as particularly attractive despite its somewhat stretched valuation. Recent official construction data has been quite volatile making it difficult to draw a clear picture as to the underlying trend. For the record, the just released RICS Q4 Construction Market Survey results are still consistent with an increase in output. Indeed, workloads continue to rise firmly, predominately driven by the private housing and commercial sectors. Even so, feedback from contributors highlights risks to future output growth; in the latest report, 80% of respondents cited financial constraints as a factor limiting activity. At the same time, the shortage of labour is still believed to be a key issue for the market, with respondents noting a particular lack of quantity surveyors and bricklayers.



UK Economy1. GDP is estimated to have increased by 0.5% in the final quarter of 2017

representing the strongest quarter-on-quarter growth rate through the year. Although this was insufficient to prevent a softening in the average annual growth rate relative to the previous year, the pick-up in Q4 does provide some encouragement looking forward.

2. One reason for encouragement is the pick-up in the volume of world trade over the past year; this could show futher improvement as global growth strengthens and should support a reasonably favourable backdrop for UK exporters.

3. By way of contrast, households face a more challenging environment; the annual growth rate of retail sales excluding fuel fell to just 1% in December. This was slowest growth rate since 2014 and reflects the growing pressure on household finances. With the inflation rate at a five year high, and wage growth subdued, there is little reason to anticipate high street spending will rebound smartly in the near term.

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1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

World Trade Index

Annual % change

Source: CPB

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2009 2010 2011 2012 2013 2014 2015 2016 2017

GDPQuaterly % change

Source: ONS

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2001 2003 2005 2007 2009 2011 2013 2015 2017

Retail Sales Volumes

Annual % change

Source: ONS

Chart 1

Chart 2 Chart 3



UK Economy4. The labour market has been strengthening since 2011 with the

employment rate now at a record high of 75.3%. Significantly, this positive trend has over the past year been led by an increase in full time rather than part-time employment. Forward looking indicators suggest the market will remain tight in the coming year.

5. The CPI measure of inflation reached a five year high near the end of 2017, whilst wage growth remained sluggish (hovering around 2% throughout the year). This has resulted in a decline in real wages, squeezing consumers’ purchasing power. The inflation rate may gradually begin to retreat as the year progresses but it will be somewhile before this is felt in household finances.

6. Markets currently expect just one hike in interest rates this year with the base rate projected to be only 1% in mid-2020. Sentiment could, however, turn more hawkish if economic news flow improves pointing to a stronger macro outlook.

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2007 2009 2011 2013 2015 2017

Headline inflation (LHS)

Real earnings (RHS)

%

Source: ONS

Consumer Prices and Real Earnings

Annual % change

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Employment

Employment Rate (LHS)Full-time Employment (RHS)Part-time Employment (RHS)

Annual % change

Source: ONS

%

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Oct/2017 Apr/2018 Oct/2018 Apr/2019 Oct/2019 Apr/2020 Oct/2020

Implied Path For Interest Rates

%

Source: Bank of England

Chart 4

Chart 5 Chart 6



Housing market7. The RICS headline house price balance has moderated throughout last

year, hovering in the range of +8 and zero; this is consistent with a flatter trend in house price inflation over the coming months.

8. Mortgage approvals, measured on a seasonally adjusted basis, fell in December to their lowest level since January 2015. This chimes with the trend in the RICS New Buyer Enquiries series (a measure of demand) which has recorded negative readings, albeit only very marginally in some cases, in each of the past nine monthly reports. Significantly as an indicator of the change in mortgage volumes with a three month lead, this points to the softer trend persisting at least during the first half of the year.

9. The softer tone in demand allied to a decline in new instructions coming on to the market continues to impact on activity levels. For the whole of 2017, the volumes of transactions was little changed from each of the previous three years at just over 1.2 million; the likelihood is the 2018 number will be a little lower.

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RICS New Buyer Enquiries and Bank of England Mortgage Approvals

RICS NBE adv. 3 months (LHS)Mortgage Approvals (RHS)

Source: Bank of England, RICS

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2006 2008 2010 2012 2014 2016 2018

RICS National House Price Balance and Land Registry House Prices

RICS House Prices adv. 6 months (LHS)

Land Registry England and Wales House PriceIndex (RHS)

Source: Land Registry, RICS

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RICS Newly Agreed Sales - adv. 6 months (LHS)

HMRC Transactions (RHS)

RICS Agreed Sales and HMRC Property Transactions

Source: HMRC, RICS

Chart 7

Chart 8 Chart 9



Housing market10. In comparison to other parts of the UK, London continues to return

the most negative sentiment in the survey. The London price balance (which mainly tracks developments in Inner London) has remained in negative territory for 22 consecutive reports, and suggests that prices will continue to soften in this area over the coming six months.

11. The sales picture across the capital is also notably downbeat. In the previous few months, respondents to the RICS have reported a flat or negative sales trend across parts of the country, however the London figures are particularity negative. Indeed, they are currently pointing to a further decline in transactions in the first half of 2018.

12. In response to an additional question included in the survey, the majority of respondents suggested the Stamp Duty exemption for First Time Buyers announced in the Autumn Budget will have little impact on market activity. Only around one-quarter judged that it would lead to a some increase in activity.

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2006 2008 2010 2012 2014 2016 2018

London Transactions

RICS London Newly Agreed Sales adv. 6 months (LHS)

Land Registry London Transactions (RHS)

Net balance % (3 month average) Annual % change (3 month average)


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London House Prices

RICS London House Prices adv. 6 months (LHS)

Land Registry Inner London House Price Index (RHS)

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Little Impact A Combination of higherprices and actvity

Higher overall activity Higher Prices

In your area, which of the following do you feel will be the likely impact of the change in Stamp Duty?

% of respondents

Source: RICS

Chart 10

Chart 11 Chart 12



Commercial property sector13. The headline RICS Rental Expectations series edged lower in the latest

report while still remaining in positive territory. This was driven mainly by a downbeat near-term outlook for retail rents. Still, the series suggests that rental values at a headline level will see a modest rise in 2018.

14. Sentiment across the industrials sector is comparatively more upbeat than the retail and office segments of the market. Indeed tenant demand has only continued to rise firmly in this part of the market. This is, in turn, being reflected in near term rental expectations which are pointing to a solid rise in industrial rental values in the coming year.

15. For London, aggregate rental expectations have remained in negative territory in all four quarters of 2017. The picture for office rents in the capital is being, to some extent, masked by the rising level of inducement packages on offer. Nevertheless, the latest readings are consistent with a drop in rental values through the course of the year.

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Industrial Rental Values

RICS Industrial Rent Expectations adv. 4q (LHS)

CBRE Industrial Rental Values (RHS)

Source: CBRE, RICS

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2001 2003 2005 2007 2009 2011 2013 2015 2017

RICS Rent Expectations and CBRE Rental Values

RICS UK Rent Expectations adv. 3q(LHS)CBRE UK Rental Values (RHS)

Source: CBRE, RICS

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2001 2003 2005 2007 2009 2011 2013 2015 2017

London Offices Rental Values

RICS London Office Rent Expectations adv. 3q (LHS)

CBRE Central London Offices Rental Values (RHS)

Source: CBRE, RICS

Chart 13

Chart 14 Chart 15



Commercial property sector16. The picture across the investment side of the market is more upbeat

than the occupier side. RICS headline Investment Enquiries series has edged up in the last two reports with investor demand picking up in the industrial and office segments of the market. As such, the series is now pointing to a further rise in capital values in 2018.

17. Significantly, the commercial real estate market continues to draw considerable interest from overseas investors. Respondents to the RICS Commercial Property Survey are reporting a steady rise in foreign investment enquiries across most parts of the UK. London remains a market of particular interest despite further feedback suggesting that it is widely perceived to be expensive (63% of respondents to the latest survey suggest it is to some extent overpriced).

18. Meanwhile, the net balance of respondents reporting a rise in London office enquires rose once again in the latest results. As such, the series is now consistent with a further increase in Central London capital values highlighting the ongoing disconnect with the occupier market.

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2017 Q1 2017 Q2 2017 Q3 2017 Q4

Foreign Investment Enquiries- Change From The Last Quarter

National

Central London

Source: RICS

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2006 2008 2010 2012 2014 2016 2018

RICS Investment Enquiries and CBRE Capital Values

RICS UK Investment Enquiries adv. 3q (LHS)

CBRE UK Capital Values (RHS)

Source: CBRE, RICS

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London Offices Investment Enquiries

RICS London Office Investment Enquiries adv. 3q (LHS)

CBRE Central London Offices Capital Values (RHS)

Source: CBRE, RICS

Chart 16

Chart 17 Chart 18



Construction sector19. Construction output was estimated to have decreased by one percent

during the final quarter of last year, although this series is often heavily revised. Moreover, this follows a contraction in output in both of the previous two quarters. However despite this, the volume of construction activity is still reported to have been 0.6% higher than in the same period of 2016.

20. The RICS Construction Market Survey continues to signal a stronger picture with the headline workloads series remaining in a tight range (+21 to +27 through 2017) and is consistent with a steady rise in output in the near term. Infrastructure workloads also remain solid with contributors noting increases across the roads and rail categories.

21. Despite the construction industry facing capacity constraints, the results of the latest survey still point to a relatively optimistic outlook for workloads and employment. The picture regarding profit margins is a little flatter.

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RICS Workloads and ONS Construction Output

RICS Workloads adv. 1q (LHS)

ONS Construction Output (RHS)

Net balance % Annual % change

Source: ONS, RICS

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Construction Output

Quarter-on-Quarter GrowthYear-on-Year Growth

% Change

Source: ONS

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2009 2010 2011 2012 2013 2014 2015 2016 2017

12m Workloads, Employment and Profit Margins Expectations

Workloads

Employment

Profit Margins

Net balance %

Source: RICS

Chart 19

Chart 20 Chart 21



Construction sector22. The lack of sufficiently skilled workers remains a key issue for firms with

contributors continuing to emphasise the adverse impact it is having on the market. The net balance of respondents reporting a lack of suitable labour has held broadly steady over the past year and suggests that unfilled vacancies in the construction sector will remain between 25,000 and 30,000 in 2018.

23. However skill shortages are not the only headwind impeding development; 80% of respondents in the latest report cited financial constraints as limiting market activity with 60% of contributors reporting planning and regulation as a key drag on growth.

24. Only 12% of respondents were confident that policies announced by the government in the White Paper and the Budget will be successful in lifting housing delivery to its target of 300,000 per year. The majority of contributors were unsure whilst 43% believed the policies will be unsuccessful in meeting this objective.

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Insufficientdemand

Weatherconditions

Shortage oflabour

Shortage ofmaterials

Financialconstraints

Competition Planning &regulation

RICS Factors Limiting Activity

% of respondents

Source: RICS

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RICS Skills Shortages Average adv. 1 year (LHS)

ONS Construction Unfilled Vacancies (RHS)

% reporting 'yes'

RICS Skills Shortages and ONS Unfilled Vacancies

000

Source: RICS, ONS

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Very confident Fairly confident Unsure Fairly confident Very confidentYes - No

Do you feel policies included in the Autumn Budget and Housing White Paper will lift housing delivery to the target of 300,000 per year?

% of respondents

Source: RICS

Chart 22

Chart 23 Chart 24

© RICS Economics 2017 Q1 2018

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“The RICS Commercial Property Survey is an excellent predictor of future IPD total returns.” North Row Capital

Download RICS Economic market surveys and reports at www.rics.org/economics• UK Residential Market Survey (monthly)

www.rics.org/housingmarketsurvey• UK Construction Market Survey (quarterly)

www.rics.org/constructionmarketsurvey• UK Commercial Market Survey (quarterly)

www.rics.org/commercialmarketsurvey• UK Rural Market Survey (semi-annual)

www.rics.org/ruralmarketsurvey• Global Commercial Market Monitor (quarterly)

www.rics.org/globalpropertymonitor• RICS / Ci Portuguese Housing Market Survey (monthly) www.rics.org/portuguesemarketsurvey• Hong Kong Residential Market Survey (monthly)

http://www.rics.org/hong-kong-residential-market-survey

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slower growth in 2018 but commercial market remains...

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