Despite headlines around current and upcoming economic challenges, occupier take-up in Q2 2022 has remained exceptionally strong: at 16.2 million sq ft, the second strongest Q2 on record behind only Q2 2021. Manufacturers again took the largest volume of space in Q2, accounting for 33% of total floorspace, with a wide range of producers taking space; to the half-year, manufacturers have taken more than 8 million sq ft. Ecommerce operators again had a quieter quarter in Q2 in contrast to their demand over the past two years but still took 2.9 million sq ft in Q2. Occupiers continue to focus on high-quality space with Grade A accounting for 13.1 million sq ft (78%). Occupiers committed to 9.1 million sq ft of built-to-suit space in Q2 (56% of quarterly take-up) and 16.0 million sq ft (50%) to the half-year.
The UK economy grew by an estimated 0.6% in June 2022, after growth of 0.4% in May 2022. A continued slowdown in GDP growth is forecast, as gas prices continue to rise, deteriorating the outlook of activity in the UK. The UK continues to experience rising inflation levels, with UK CPI reaching 9.4% in June 2022, and forecast to reach just over 13% by the end of the year. As a result, further interest rate rises are expected this year. The employment market remains strong with the unemployment rate falling to 3.8% in the three months to June 2022. However, the Bank of England has warned that the unemployment rate will rise given the headwinds the economy is currently facing.
With the battle for the next UK Prime Minister ongoing and due to be announced in early September, the new leader faces the arduous task of how best to approach the slowing economy.
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.
Retail: tourists and office workers are the missing ingredient to high street recovery
A few months have passed since the re-opening of non-essential retail back in April and the latest data releases paint a picture of a steadily recovering high street. GfK Consumer Confidence Barometer External Link was back to pre-pandemic levels in June and retail sales surged 11% above 2019 levels in May according to the ONS. By contrast, footfall was still down by 27% relative to 2019, albeit this represents massive improvements from -63.7% registered in March. Not so surprisingly, shopping destinations more reliant on office workers and tourists for trading are taking longer to recover given the continued high prevalence of home-working and ongoing restrictions to international travel. In the second week of July, footfall across the London’s New West End was still down by 63% relative to the corresponding week in 2019. We estimate that only 12% of the top 20 nationalities of international visitors to London were in the UK government “Green List” at the time of last update. The lifting of all main social distancing restrictions from 19 July should continue to support the recovery in footfall albeit further policy changes cannot be ruled out.
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