Industrial: Take up remains subdued as caution persists
Take up has continued to recede amidst tough macroeconomic conditions with just 45 deals taking place throughout Q2 2023, falling back on the 62 recorded during Q1 and below the typical 53 Q2 deals a quarter recorded during the five years leading up to the Covid 19 pandemic. The fall back in demand has been less pronounced for best in class stock, with demand for Grade A space falling back by just 18% whilst lower quality grades B and C have fallen back by 38% and 40% respectively.
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Retail: Occupational market remains resilient
Performance from an occupational perspective remains mixed with occupiers continuing to focus on prime locations and securing placement in and amongst other strong brands, this is inducing competitive pressure for best-in-class locations resulting in pockets of moderate rental growth. A number of big brands remain acquisitive in the United Kingdom, Hotel Chocolat, Claires Accessories, Shozeone, and Gails Bakery all signing for space within the quarter.
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Office take-up across the Big Five (Birmingham, Bristol, Edinburgh, Leeds and Manchester) and Central London markets totalled 2.5 million sq ft in Q2 2023. This is a 7% decline versus Q1 2023 and 22% below the five-year quarterly average. A 64% majority of space transacted was Grade A quality, well above the 57% average across the past five years and continuing to evidence the post-pandemic bifurcation trend in office demand. Central London reported 1.8 million sq ft of take-up in the second quarter, with the remaining 716,962 sq ft transacting in the Big Five.
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Prime Central London Residential
Average achieved £ per square foot values in Prime Central London residential increased significantly during Q4 2020 (from Q3 2020) buoyed by a strong Autumn market. While a quarterly rise in isolation does not necessarily indicate a continuation of recent house price inflation, it acts a strong indicator of overall market strength. While our 365-day index of rental values shows rental prices remaining in a state of lockdown induced freefall, the average £ per square foot, per annum value achieved in Q4 2020 indicates we may be about to see the bottom of the market. With lockdown restrictions potentially being eased in April, we would anticipate a return to rental inflation towards the end of May. The combining factors of stable values and falling rents has seen gross rental yields in Prime Central London fall below 3% for the first time in recent history. This contraction is even greater in Outer Prime London markets, where these combining trends are exaggerated.
Europe Office Market
Prime office rents across Europe continue to grow, up by an average of 1.1% in Q2 2023 maintaining annual growth at a robust 5.6%. Despite a reduction in demand, incentives have remained unchanged, underscoring the willingness of tenants to pay a premium for offices with the best certifications and sustainability credentials.
Demand for office space across Europe remained subdued in the second quarter with 2.3m sqm of space leased, on par with the activity in Q1, although take-up in H1 2023 was 20% below levels in the same period last year at 4.7m sqm. The amount of available space grew 1% to 24.5m sqm, equivalent to 8.5% of stock. It remains below the highs of over 10% in the wake of the global financial crisis. Although completions remain high, the amount od space under construction has fallen compared with the previous quarter.
Against a backdrop of anaemic growth, rising interest rates and tighter credit conditions, investment is expected to remain subdued over the rest of the year as service sector continues to contract. Most of Europe is likely to narrowly avoid a ‘technical’ recession. As such we expect to see a sustained, albeit weak, recovery in early 2024.
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