Accelerating success.

¹15 Dec 14 (data and revisions)Sources: ONS, Markit, FT, EIA, IPD, Haver

Research & Forecast Report

United Kingdom | SnapshotDecember 2014

EconomyPMI data continues to show economic momentum carrying forward into 2015 with acceleration in the UK CIPS weighted average from 56.2 to 58.1. Inflation remains low (CPI 1.0%; RPI 2.0%) and is likely to fall further given substantial oil price declines. The labour market continues to tighten, but strong wage growth is yet to materialise. The Autumn Statement brought greater clarity about which issues are likely to differentiate the May election contenders. Changes to residential stamp duty appear to have ‘out-Robin Hooded’ the opposition’s ‘merry men’ and may have removed mansion tax from the agenda. Uncertainty remains with respect to commercial rates and possible commercial stamp duty reform (especially for corporate enveloped holdings).

Colliers view: The economy is stable with data suggesting momentum. GDP in 2015 is likely to fall in a range between 2.5% to 3%. May’s general election is generating policy uncertainty.

InvestmentTransaction volumes (£48bn) are up by15% against 2013 for the year to the end of November. Will December match last year’s £12bn in transactions? The signs are positive, although some deals are taking longer as pricing expectations for ‘secondary kit masquerading as prime’ has caused a few investors to pause. The split between Central London and regional investment was roughly 50-50 in November. Overseas investors took a 47% share of the UK total, with institutions taking 33%. UK institutions dominated outside of London, with a 44% share.

Retail shops: The demand for prime shops remains strong as Emperor International’s purchase of 181-183 Oxford Street for £35m at 2.6% IY might attest. Few large deals were completed ex-London. Shopping centres: Three significant deals completed with M&G, Tesco PF and TIAA Henderson completing on assets in Maidstone (£110m at 6% IY), Lincoln (£46m at 5.9% IY) and Salisbury (£25m at 6.6% IY). Retail warehouses: Several small parks changed hands. Standard Life led the pack with its purchase of Tindale Crescent (M&S, TK Maxx) for £23.6m at 5.3% IY. Other £10m+ parks traded in a range from 5.4% to 6.5% IY. Supermarkets: Another Morrisons forward funding was agreed by Aberdeen AM (£41m) for completion in 2015. A Tesco convenience store also changed hands in North Anston (near Rotherham) for £0.7m at 7% IY. Year-end valuations may change the pricing tenor of the supermarket sector.

Central London Offices: The Gherkin sale (£726m) suddenly looks modest as QIA buys 8-16 Canada Square in Canary Wharf for £1.1bn. Nine deals in excess of £100m have been agreed or completed since the

beginning of November, with several other large deals likely before year-end. Central London yields remain pressured at below 5% in the City and below 4% in the West End. Regional: City centre deals continue to be agreed at yields on either side of 6%. F&C bought 158/170 Edmund Street for £11.7m at 5.75% IY. M&G bought One Reading Central (across from the central rail station) for £95m at 6.3% IY and, in Manchester, Rockspring bought Peter House in St Peters Square for £23.7m at 6% IY.

Industrial: Over £1.1bn has been completed since the beginning of November, with about 50% in distribution warehouse and 50% in portfolios and multi-let industrial assets. Blackstone acquired a £153.3m portfolio from SEGRO for 5.7% IY. Patrizia bought a 24-asset portfolio of mixed assets for £127m at 9.4% IY. Other deals include L&G’s forward funding of a Next distribution warehouse in Doncaster for £65m and Standard Life’s acquisition of a £23.8m mixed portfolio from SEGRO for 7.25% IY. The appetite for industrial assets remains very strong.

Colliers view: A strong year-end is expected with a wide range of assets trading UK-wide. Foreign money is dominating London, with UK funds dominating the regions. Pricing is firm.

Key IndicatorsLatest1 End-Nov End-Oct

UK GDP (%q/q) 0.7 0.7 0.7

UK PMI (weighted average) 58.1 58.1 56.2

EURO PMI (composite) 51.1 51.1 52.1

UK CPI (%) 1.0 1.0 1.3

UK RPI (%) 2.0 2.0 2.3

UK BASE RATE (%) 0.5 0.5 0.5

UK 10YR GILT (% eop ) 1.84 1.93 2.39

GBP 3M LIBOR (% ) 0.56 0.53 0.55

GBP 5YR SWAP (% MID) 1.48 1.50 1.79

STERLING EFFECTIVE (FT) 87.4 86.7 87.5

GOLD (USD) 1209 1182 1164

OIL BRENT (USD) 62.11 78.81 85.86

FTSE 100 6297 6723 6547

IPD All property IY 5.43 5.43 5.48

IPD All property EY 6.47 6.47 6.50

Investment Transaction Volumes

Source: Property Data Ltd

Headline office rents (December 2014)

Source: Colliers International

0

5

10

15

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2013 2014 £ billions

Retail Sales Growth % m/m

Source: ONS, Eurostat

-5.0%

-2.5%

0.0%

2.5%

5.0%

Oct

-09

Oct

-10

Oct

-11

Oct

-12

Oct

-13

Oct

-14

excl. fuel Retail Sales De�ator

0 25 50 75

100 125 150

Leed

s

Bris

tol

Glas

gow

Birm

ingh

am

Edin

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h

Man

ches

ter

Aber

deen

City

of L

ondo

n

Wes

t End

£ psf per annum

Mortgage Rates

Source: Bank of England

0

2

4

6

8

Nov

06

Nov

07

Nov

08

Nov

09

Nov

10

Nov

11

Nov

12

Nov

13

Nov

14

2 year �xed (75% LTV) Standard variable rate

percent

2 Research & Forecast Report | December 2014 | Snapshot | Colliers International

OCCUPIER MARKETSRetail ONS retail sales (ex-petrol) accelerated in October, growing 0.8% m/m (4.6% y/y). The improving data is consistent with the BRC November figure (up 0.9% y/y) and John Lewis’ sales data (up 14.4% y/y in the last week of November). The much hyped Black Friday made its mark. Despite positive figures, the ONS sales deflator (ex-petrol) fell to -1.3% y/y suggesting that sales are achieved at the expense of profit. The food store deflator is decisively negative for the first time in 10 years. In contrast, non-store retail showed price growth of 1.7% y/y. The Centre for Retail Research shows that despite weak margins, the number of stores affected by failures is likely to be the lowest since 2010 and down by a third against 2013. Central London rental growth remains strong with rents rising by 5.5% since the beginning of the year; the Rest of the UK registered -0.6% growth. Retail warehouses are also up 0.3%, with shopping centres down by 0.4%, although shopping centres in the South have fared better, registering 0.1% growth.

Colliers view: Improvement in occupier markets (ex-London) is slow, with price sensitivity and keen competition slowing progress.

Offices Central London: Headline rents are moving in line with expectations; improving demand continues to be greeted with lack of quality space. The City mid-year vacancy rate of 5.5% will fall further and the West End’s 3.8% rate is already likely to have fallen below 3%, hence headline rents are up to £65.00 psf and £122.50 psf respectively. The trend is evident across most London sub-markets. The IPD shows that City and West End rents are up 9% and 9.5%, respectively, in the year to October. Regional: Despite overall declines in aggregate, Thames Valley take-up, demand and transactions are very strong in the sub-10k sq ft category. Central CBDs are also feeling pressure with rental growth expectations increasing. Bristol and Birmingham may join Manchester soon, near the £30 psf quoting benchmark. So far, IPD data shows only modest growth in the Rest of England (0.4%), but Scotland is seeing stronger growth (1.4%).

Colliers view: Unchanged. Leasing markets are strengthening UK-wide, with tipping points being reached in regional CBDs. A new ‘spec development’ cycle has begun.

Industrial UK manufacturing continued to regain lost ground in November with the latest PMI figure increasing slightly from 53.2 to 53.5. Lloyds Bank’s regional PMI indicators show strength across the UK led by the West Midlands (59.0), the South East (58.8) and the East (58.7). Outside London and the South East, the West Midlands continues to see the strongest rental growth, which is up 2.2% so far in 2014. All regions are reporting rental increases. The ‘spec’ market keeps threatening to show a decisive uptick, but pre-letting agreements still define the development market, with finance yet to make any significant impact.

Colliers view: Unchanged. Occupier markets are strengthening; incentives are tightening, with rental growth observed UK-wide. A new ‘spec cycle’ is stymied by lack of finance.

Residential The Nationwide and Halifax November indices show that house price growth continues to moderate, with annual growth rates down to 8.5% and 7.3% respectively. Mortgage approvals fell for the fourth consecutive month to 59,426 in October, down 22% from January’s peak of 76,574. Mortgage rates also fell by another 5 bps in November with the two year fixed 75% LTV mortgage rate at an extraordinary 2.16%. The Autumn Statement included a new residential stamp duty regime that may have derailed any new mansion tax; new costs for ‘non-doms’ were also announced. The impact on prime markets is uncertain, but despite sensational headlines, may prove transitory and short-lived. Focus may shift to council tax banding for the most expensive properties.

Colliers view: UK housing markets have cooled in line with a slowdown in mortgage approvals. New legislation effects on prime markets may prove short-lived and ultimately marginal.

This report gives information based primarily on Colliers International data, which may be helpful in anticipating trends in the property sector. However, no warranty is given as to the accuracy of, and no liability for negligence is accepted in relation to, the forecasts, figures or conclusions contained in this report and they must not be relied on for investment or any other purposes. This report does not constitute and must not be treated as investment or valuation advice or an offer to buy or sell property. (December 2014) © 2014 Colliers International.

Colliers International is the licensed trading name of Colliers International Property Advisers UK LLP which is a limited liability partnership registered in England and Wales with registered number OC385143. Our registered office is at 50 George Street, London W1U 7GA. 14286

For more information, please contact:Walter Boettcher +44 20 7344 6581walter.boettcher@colliers.com

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