Q4 2015

Where next for UK real estate?

Property IQ

AuthorsWill MatthewsHead of Researchwmatthews@deloitte.co.uk+44 (0)20 7303 4776

Rebecca ShafranManager – Researchrshafran@deloitte.co.uk+44 (0)20 7007 0069

Over the latest quarter, both domestic and global economic indicators have delivered mixed signals.

The UK economy continued to improve in Q3 2015, growing 0.5% according to preliminary estimates, marking the eleventh consecutive quarter of economic growth. Although the pace was slower when compared to Q2, the outlook for 2016 has picked up with the consensus forecast suggesting the economy will expand 2.4% next year.

However, Deloitte’s CFO Survey reported that CFOs’ perception of external financial and economic uncertainty has seen the sharpest rise for five years. This was mostly a result of concerns over global growth prospects, with CFOs still taking a favourable view of the UK’s economic outlook. Emerging market volatility now ranks joint second, together with concerns about Euro area growth, on their list of worries. These concerns are not unfounded.

The weakening of emerging economies, especially China, combined with the strength of the pound has dented UK exports and this is feeding through to manufacturing output, which fell in Q3.

Recent news on domestic consumption has been much more positive. Retail sales increased 1.9% in September, household consumption continues to rise, and further real wage growth is being recorded as inflation remains virtually non‑existent. The latest Deloitte Consumer Tracker also noted an improvement in consumer confidence now reaching a record high.

And so, the UK economy continues to perform well. PMI business activity suggested further expansion over the quarter, albeit at a slower pace than in the three months to June, and employment growth remains strong across the UK. Many parts of the UK reported record levels of employment in Q3, and the national unemployment rate has fallen to its lowest level since mid‑2008.

Deloitte Real Estate Yield Matrix – changing sentiment towards yields on prime propertyShopping centre sentiment has improved over the last three months

Sector Category Dec

‑09

Jan‑

10

Feb‑

10

Mar

‑10

Apr

‑10

May

‑10

Jun‑

10

Jul‑1

0

Aug

‑10

Sep‑

10

Oct

‑10

Nov

‑10

Dec

‑10

Jan‑

11

Feb‑

11

Mar

‑11

Apr

‑11

May

‑11

Jun‑

11

Jul‑1

1

Aug

‑11

Sep‑

11

Oct

‑11

Nov

‑11

Dec

‑11

Jan‑

12

Feb‑

12

Mar

‑12

Apr

‑12

May

‑12

Jun‑

12

Jul‑1

2

Aug

‑12

Sep‑

12

Oct

‑12

Nov

‑12

Dec

‑12

Jan‑

13

Feb‑

13

Mar

‑13

Apr

‑13

May

‑13

Jun‑

13

Jul‑1

3

Aug

‑13

Sep‑

13

Oct

‑13

Nov

‑13

Dec

‑13

Jan‑

14

Feb‑

14

Mar

‑14

Apr

‑14

May

‑14

Jun‑

14

Jul‑1

4

Aug

‑14

Sep‑

14

Oct

‑14

Nov

‑14

Dec

‑14

Jan‑

15

Feb‑

15

Mar

‑15

Apr

‑15

May

‑15

Jun‑

15

Jul‑1

5

Aug

‑15

Sep‑

15

Shops

Prime major cities

Cathedral cities

Market towns

Shopping

centres

Regional dominant

Sub‑regional

Major town centre schemes

Smaller urban schemes

Retail

warehouses

Parks (open A1)

Parks (bulky)

Solus

Car showroomsLet to dealership

Let to manufacturer

Leisure parks

Supermarkets Standalone superstore

Industrial

Distribution (15 year term)

Distribution (5 year term)

Modern ind. est. (Regional)

Modern ind. est. (S East)

Offices

City

West End

Midtown

West London

South East

Major cities

Out‑of‑town

Sentiment indicator: n Sentiment weakening n No change in sentiment n Sentiment strengthening

Source: Deloitte Real Estate

Deloitte Insight

Meanwhile, inflation fell again in September, below market expectations, and it now looks extremely unlikely that the MPC will vote for a rise in interest rates before early 2016.

What does this mean for UK commercial property? One thing for certain is that demand for UK property remains high. The volatility of the Chinese economy and other emerging markets, as well as ongoing concerns regarding the Middle East, are all acting as drivers of activity, with overseas investors turning to UK real estate for investment opportunities. Whilst US investors remain a major player in the UK market, for the first time ever Far Eastern investors accounted for a greater share of deals in Q3; 20% and 32% respectively. The London market in particular continues to attract new investors from Japan, Hong Kong, Taiwan and China, whilst Korean and Malaysian investors, who bought in a previous phase, have been realising strong capital value gains by selling in central London and moving on to other market sectors. Volumes in the nine months to September totalled almost £49bn, the highest level on record.

0%

20%

40%

60%

80%

100%

Sep-

15Ju

n-15

Mar

-15

Dec

-14

Sep-

14Ju

n-14

Mar

-14

Dec

-13

Sep-

13Ju

n-13

Mar

-13

Dec

-12

Sep-

12Ju

n-12

Mar

-12

Dec

-11

Sep-

11Ju

n-11

Mar

-11

Dec

-10

Sep-

10Ju

n-10

Mar

-10

Dec

-09

Sep-

09

Chart 1. Share of investment by sector

Industrial Office Retail Other

Source: Property Data

In performance terms, UK offices continue to top the table. Demand for prime office investments is still competitive and yields remain under downward pressure. Rental growth remains strong, predominantly driven by the London office market but Eastern offices recorded historically high rental growth over Q3, at 3.5%. In London, the latest Deloitte Crane Survey continues to report increasing volumes under construction. However, this is combined with strong early leasing activity, and therefore low supply is still a driver of rental growth. More generally, demand for space continues to increase as a result of employment growth.

Industrial property also continues to perform despite the problems in the manufacturing sector. Yields on both prime distribution and modern industrial estates outside London have fallen further in the last year.

Meanwhile, retail continues to fall behind the other main sectors. Although London retail is performing strongly as a consequence of exceptional rental growth and low yields in core locations, falling or flat rents in many regions has meant the sector outside London still lags. However, economic indicators look positive. The latest fall in inflation and rising disposable incomes are having a positive impact on retail sales and we expect consumer sentiment to improve as we head towards Christmas.

Chart 2. Rental growth by sector

Industrial All propertyOfficeRetail

Source: MSCI/Deloitte

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Sep-

15

Jun-

15

Mar

-15

Dec

-14

Sep-

14

Jun-

14

Mar

-14

Dec

-13

Sep-

13

Jun-

13

Mar

-13

Dec

-12

Sep-

12

Jun-

12

Mar

-12

Dec

-11

Sep-

11

Jun-

11

Mar

-11

Dec

-10

Sep-

10

We also continue to note a stronger interest in non‑traditional property types. Whilst last quarter we highlighted the significant increase in investment in student housing, this quarter it was the hotel sector that stood out. Investment activity in UK hotels reached its highest level since 2007, totalling £5bn in the 9 months to September. Once again, overseas investors dominated this sector accounting for 76% of total investment in the year‑to‑date. This was another example of foreign investors looking for low‑risk income‑producing assets within the UK to deploy their capital, and investors generally becoming more willing to invest in alternative property. It also suggests a confidence by cross‑border investors in the UK economy and domestic tourism industry.

The current strength of the market has clearly exceeded the majority of expectations, and the IPF consensus forecast for total returns this year has consequently been raised further to 13.9% in the latest report. This more optimistic outlook extends to 2016 as well: the average total return for next year has risen from 8.2% in February’s survey to 9.2% in August 2015. The capital growth forecast has also improved over the year. The office sector is still anticipated to lead the way in 2015 and 2016, predominantly due to strong rental growth in the City and West End. The forecast for the retail sector has slipped back over the year. The big difference for 2016 is that, even with ongoing investment demand, downward yield shifts are unlikely to factor so highly as a driver of performance. Returns will become more reliant on rental growth, and whilst a number of the economic drivers remain in place to support this, our expectations are that performance overall will ease back.

Property IQ – Q4 2015 Where next for UK real estate?2 |

Growth despite softer global indicators

The economy

2.0

2.2

2.4

2.6

2.8

20162015

Changing consensus forecasts for GDP growth

Jul-14

Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15

Apr-15 May-15 Jun-15 Jul-15

Feb-14

Feb-15

Aug-15 Sep-15

Mar-15

Mar-14 Apr-14 May-14 Jun-14

Forecasts made in:

Source: HM Treasury

GD

P gr

owth

%

PMI business activity, July – Sept 2015

North West

Scotland, 50.7

North East, 53.7

Yorkshire & Humber, 54.3

East Midlands, 56.6

West Midlands, 55.1

Wales, 54.1

North West, 51.9

Northern Ireland, 52.2

East, 56.8

London, 57.3

South East, 57.1

South West, 56.5

North West

East Midlands

Source: Markit

Risk appetite% of CFOs who rate the level of external financial and economic uncertainty facing their business as above normal, high or very high

Source: Deloitte CFO Survey

40%

60%

80%

100%

Sep-

15

Jun-

15

Mar

-15

Dec

-14

Sep-

14

Jun-

14

Mar

-14

Dec

-13

Sep-

13

Jun-

13

Mar

-13

Dec

-12

Sep-

12

Jun-

12

Mar

-12

Dec

-11

Sep-

11

Jun-

11

Mar

-11

Dec

-10

Sep-

10

Output recovery continues in Q3

• The economy continued to improve in Q3 2015 growing 0.5%. It marked the eleventh consecutive quarter of economic expansion. Although growth slowed over the quarter, as a result of softer global demand, the outlook for 2016 has picked up with the consensus forecast suggesting the economy will expand 2.4% next year.

• Agriculture, services and production output all expanded over the quarter, however manufacturing output decreased 0.3%. Retail sales growth picked up in September increasing 1.9%, and household consumption continues to increase.

Employment levels at record highs

• PMI business activity continued to point at growth over the quarter albeit at a slower pace than in the three months to June, a likely consequence of concerns surrounding the stability of the global economy and the impact of China’s stock market volatility.

• However, employment growth is still strong across the UK with many regions reporting record levels of employment, while the national unemployment rate has fallen to it lowest level since mid‑2008.

• Looking ahead, London is forecast to achieve the highest average output growth over the next decade, whilst the North East is expected to achieve the weakest.

Sharp rise in business uncertainty

• The latest Deloitte survey reported that CFOs’ perception of external financial and economic uncertainty have seen the sharpest rise since we first asked this question five years ago. This was mostly a result of concerns over global growth prospects, with CFOs still taking a favourable view of the UK’s economic outlook.

• Emerging markets now rank joint second, together with concerns about Euro area growth, on CFOs’ list of worries. According to the survey, firms are adopting a more defensive stance. In particular, the outlook for hiring over the next 12 months has deteriorated noticeably, along with that for capital expenditure, as the emphasis on cost cutting increases.

| 3Property IQ – Q4 2015 Where next for UK real estate?

Far Eastern investors increase share

UK commercial property

Property investment by quarter (£m)

Q3 Q4Q1 Q2

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

Source: Property Data

Share of investment by investor type Q3 2015

2%

32%

24%

20%

15%

7%

Far Eastern

Other European

US

Middle Eastern

Others

German

Source: Property Data

Net investment by investor type (£m)

2015 Q1 2015 Q2 2015 Q3

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

Oth

ers

Occ

upie

rs

Priv

ate

Ind

ivid

uals

Ove

rsea

sIn

vest

ors

Priv

ate

Prop

Co

Quo

ted

Prop

Co

UK

Inst

itutio

ns

Source: Property Data

Third quarter slowdown in investment deals

• Investment deals totalled over £48.89bn in the nine months to September; the highest level on record. However, over the latest quarter activity slowed. The £13.3bn of transaction activity recorded in Q3 was the weakest level of investment recorded in over a year.

• By sector, office investment continued to dominate, accounting for 43% of activity. Investment in ‘other’ property remained strong whilst retail and particularly industrial investment lagged behind.

• Portfolio deals remain popular amongst funds looking to invest large amounts of capital into real estate.

Far Eastern investors start to dominate

• Overseas investors remain the dominant investor type in the UK real estate market, accounting for 44% of all investment in the quarter.

• Whilst US investors have remained a major player in the UK market, their share of investment dropped significantly in Q3 to just 20%. For the first time ever Far Eastern investors accounted for a larger share of activity, at 32% in Q3.

• The London market continues to attract new investors from Japan, Hong Kong, Taiwan and China, reflected in the high levels of activity by Far Eastern investors in Q3. Korean and Malaysian investors, who bought in a previous phase, have been realising strong capital value gains by selling in Central London and moving on to other market sectors, typically shopping centres.

UK institutions as net sellers

• After two quarters as net investors, UK institutions joined private property companies and owner occupiers as net sellers in Q3, taking advantage of high property values.

• Listed property companies, private individuals and overseas investors remain net buyers over the quarter.

Property IQ – Q4 2015 Where next for UK real estate?4 |

Offices rental growth high

UK commercial property

Property yields vs. swap rates (%)

-3

-1

1

3

5

7

1

2

3

4

5

6

7

820

15

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

Positive carry (RHS)

5 year swap rate (LHS)All property initial yield (LHS)

Negative carry (RHS)

% %

Source: Datastream/MSCI

Office rental growthQuarter‑on‑quarter (%)

-12-10-8-6-4-20246

Offices UK

Offices South EastOffices West End

Offices City

-12-10-8-6-4-20246

Sep-

15

Mar

-15

Sep-

14

Mar

-14

Sep-

13

Mar

-13

Sep-

12

Mar

-12

Sep-

11

Mar

-11

Sep-

10

Mar

-10

Sep-

09

Mar

-09

Sep-

08

Mar

-08

Sep-

07

Mar

-07

Sep-

06

Source: MSCI

Retail rental growth (%)Sept 08 – Sept 15

-20

-10

0

10

20

30

40

Wal

es

Sout

h W

est

We s

t M

idla

nds

Scot

land

East

ern

York

s &

Hum

ber

East

Mid

land

s

Nor

th W

est

Nor

th E

ast

Sout

h Ea

s t

Nor

ther

n Ir

elan

d

Rest

of

Lond

on

City

& M

id T

own

Wes

t En

d

Source: MSCI

Yield gap remains an attractive feature

• All Property initial yields contracted another 8bps to 5.06% in Q3 2015. Although this was the lowest initial yield recorded since November 2007, the fall in yields continues to slow. The 5‑year swap rate, at 1.42%, meant that the yield gap increased over the quarter to 364 bps.

• The swap rate has hovered around 1.2% – 1.7% since the start of the year, under little upward pressure as mixed economic data is doing little to pressurize the MPC to raise rates earlier than generally envisaged, around Q2 2016.

Eastern office rental growth emerges

• UK office rental growth picked up again in Q3 according to MSCI. Although it is predominantly driven by the London office market, Eastern offices also recorded historically high rental growth over the quarter, at 3.5%.

• The latest Deloitte Crane Survey continues to report increasing volumes of new space under construction in central London. However this is combined with early leasing activity, and therefore low supply is still a driver of rental growth in this market.

• Demand for space continues to increase as a result of employment growth, however the latest CFO Survey suggests CFOs have scaled down their expectations for growth in hiring.

• The IPD All Office annual total return stood at 19.5% in September, of which capital value growth contributed 14.6%.

Retail rents still below peak

• Despite an improvement in retail sales and consumer confidence, retail remains the weakest of the three main property sectors with a total return in Q3 of 9.5% pa. This is mostly a result of weak rental growth.

• Outside London, rental value growth has been flat over the last three years and retail rents have not yet recovered to pre‑crisis levels. West Midlands and South West retail recorded further falls in rental growth in Q3 2015. Shopping centres and retail warehouses have performed more resiliently than standard shops.

| 5Property IQ – Q4 2015 Where next for UK real estate?

Hotels back in favour

UK commercial property

Industrial total returns, quarter‑on‑quarter %

UK London

-15

-10

-5

0

5

10

15

Sep-

15

Mar

-15

Sep-

14

Mar

-14

Sep-

13

Mar

-13

Sep-

12

Mar

-12

Sep-

11

Mar

-11

Sep-

10

Mar

-10

Sep-

09

Mar

-09

Sep-

08

Mar

-08

Sep-

07

Mar

-07

Sep-

06

Mar

-06-15

-10

-5

0

5

10

15

Source: MSCI

UK hotel investment by investor type (£bn)

0

1

2

3

4

5

6

2012 2013 2014 2015 YTD

Cross-border Equity fund & institutional

REITs/listed Private/unlisted

User/other Unknown

Source: Real Capital Analytics

Total return outlookAnnual total returns %

RangeIPD historic IPF consensus central forecast

-30

-20

-10

0

10

20

30

2003 2005 2007 2009 2011 2013 2015 2017

Source: IPF Consensus Forecasts/MSCI

Industrial sector activity slower in Q3

• The industrial property total return was only marginally weaker than the office sector in the year to September, at 19.1%, predominantly driven by capital growth of 12.9%.

• Prime distribution yields have fallen 75bps in the 12 months to September 2015, and 50 bps for modern industrial estates outside London.

• Transaction levels in Q3 were down 27% on Q3 2014 and total volumes for the full year look set to be lower.

• Institutional funds were the predominant buyer type, accounting for 44% of transaction volumes over the quarter, followed by listed property companies.

Hotel investment hits a high

• The level of investment activity in UK hotels has reached its highest since 2007, totalling £5bn in the nine months to September.

• Overseas investors have been the most active in this sector accounting for 76% of total investment in the year‑to‑date.

• There have been a number of large portfolio deals in the sector over the last year, and the investment levels suggests a confidence in the UK economy and domestic tourism industry by cross‑border investors.

• Regional hotels in particular have performed strongly, with Glasgow and Leeds both seeing robust average daily rate growth over the year to June 2015, at 11.6% and 9.2% respectively.

Improving prospects for 2015

• The outlook for property performance in 2015 increased further to 13.9% according to the latest IPF consensus report. This more optimistic outlook extends to 2016 as well: the average total return for next year has risen from 8.2% in February’s survey to 9.2% in August 2015.

• The capital growth forecast has also improved over the year with a 8.1% rise in values expected, compared to 7.0% in February.

• The office sector is still expected to lead the way in 2015 and 2016. This is predominantly due to strong rental growth in the City and West End. The forecast for the retail sector has slipped back over the year.

6 | Property IQ – Q4 2015 Where next for UK real estate?

Recent researchRecent publications

Technology and people:The great job-creating machine

J558 td Article on technology and jobs.indd 1 08/09/2015 10:40

Technology and people: The great job‑creating machine

Q3 2015

Deloitte Insight

The latest Deloitte Consumer Tracker shows that UK consumers have shrugged off the turmoil in the global financial markets, with consumer confidence back to a record high in Q3 2015. Consumer confidence rose by two percentage points returning to a four-year high during the same period that saw the FTSE100 index fall by 700 points. All six measures of consumer confidence were up quarter-on-quarter, with the strongest gains seen in consumer confidence regarding their level of debt, job opportunities and career progression.

The regional breakdown shows a strong recovery in confidence among consumers living in London and the South East. This comes after a fall in the previous quarter, when concerns about the weakness of the London property market and the affordability of housing weighed on consumers’ minds. Those living in the capital are now once again displaying the highest levels of confidence compared to the rest of the UK, with their sentiment on job security and debt level showing the greatest improvement.

Looking at the national picture, rising real wages have contributed to increasing confidence in job security. Our data shows there has been an increase in the proportion of consumers who have received a pay rise or bonus, while the number of consumers who have suffered a loss of income or lost their job remained static.

The value of spending across a range of essentials slowed in Q3 2015 as lower inflation in key categories including food, utilities and transport reduced pressure on consumer budgets. The most pronounced weakening in spending came in the grocery category where competition among the big four grocers and the discounters continues to drive prices down. The falling cost of many essentials has enabled consumers to spend more on discretionary items. The core leisure category continues to see good growth, with spending in areas such as eating out and going out increasing in the third quarter.

In Q3 2015, the gap between defensive and expansionary spending behaviours increased once again, as the proportion of consumers displaying defensive behaviour fell to its lowest level since our survey began. In particular, the proportion of consumers bargain-hunting declined and we also saw a drop in the number of consumers spending less through buying fewer items. At the same time the proportion of consumers buying more items due to sales or special offers increased, highlighting the role that promotional activity is playing in driving more expansive behaviour.

The outlook for Q4 2015 is positive for the leisure sector which is likely to benefit from continued gains in real earnings. The outlook for grocery retailing appears more challenging with consumers expecting to continue reducing their spending on groceries.

The Deloitte Consumer TrackerUK consumers shrug off global turmoil

Chart 1. Deloitte Consumer ConfidenceNet % of UK consumers who said their level of confidence has improved over the past three months

-20%

-16%

-12%

-8%

-4%

0%

Q32015

Q22015

Q12015

Q42014

Q32014

Q22014

Q12014

Q42013

Q32013

Q22013

Q12013

Q42012

Q32012

Q22012

Q12012

Q42011

Q32011

Overall consumer confidence (q/q)*

* Net balances

Key Indicators

Confidence in level of disposable income (q/q)*

Essentials spending (y/y)*

Discretionary spending (y/y)*

ONS retail sales value growth Aug-15 (y/y)

CPI inflation Aug-15 (y/y)

LatestPrevious

-7% -5%

Previous Latest

-15% -13%

Previous Latest

+9% +3%

Previous Latest

-5% -6%

Previous Latest

+4% +0.9%

Previous Latest

+1.5% 0%

AuthorsBen PerkinsHead of ResearchConsumer Business020 7307 2207beperkins@deloitte.co.uk

Céline FenechResearch ManagerConsumer Business020 7303 2064cfenech@deloitte.co.uk

Aino TanResearch Manager Consumer Business020 7007 4406aintan@deloitte.co.uk

J1797 jonh Deloitte Consumer Tracker.indd 1 19/10/2015 13:42

The Deloitte Consumer Tracker UK consumers shrug off global turmoil

The State of the State 2015-16 Recalibrating governmentUK Public Sector | #stateofstate

J976_mw_SOTS_15_Brochure_v4.indd 1 15/10/2015 15:11

The State of the State 2015‑16 Recalibrating government

The Deloitte Consumer ReviewMade-to-order: The rise of mass personalisation

The Deloitte Consumer Review Made‑to‑order: The rise of mass personalisation

From Brawn to BrainsThe impact of technology on jobs in the UK

From brawn to brainsThe impact of technology on jobs in the UK

J1051 lb Brawn to Brains.indd 1 16/09/2015 16:37

From brawns to brains The impact of technology on jobs in the UK

London Office Crane Survey Construction activity boost

www.deloitterealestate.co.uk/Research.aspx

The Deloitte CFO SurveyKey findings:

• CFO perceptions of uncertainty at a two‑and‑a‑half‑year high.• Risk appetite down, following equity market sell‑off.• Rate rise and emerging market weakness top corporate worry list.• Majority of CFOs think Chinese slowdown will negatively affect their business

This is the 33rd quarterly survey of Chief Financial Officers and Group Finance Directors of major companies in the UK.

The Deloitte CFO Survey is the only survey of major corporate users of capital that gauges attitudes to valuations, risk and financing.

Ian StewartChief Economist+44 (0)20 7007 9386istewart@deloitte.co.uk

Q3 2015

October 2015

The Deloitte CFO Survey

AuthorsIan StewartChief Economist020 7007 9386istewart@deloitte.co.uk

Debapratim DeSenior Economic Analyst020 7303 0888dde@deloitte.co.uk

Alex ColeEconomic Analyst020 7007 2947alecole@deloitte.co.uk

ContactsIan StewartChief Economist020 7007 9386istewart@deloitte.co.uk

Richard MuschampCFO Programme Leader020 7007 0724rmuschamp@deloitte.co.uk

For current and past copies of the survey, historical data and coverage of the survey in the media and elsewhere, please visit:

www.deloitte.co.uk/cfosurvey

Uncertainty mountsCorporate risk appetite and sentiment have faded in the face of weakness in emerging economies and global equity markets. Chief Financial Officers’ perceptions of external financial and economic uncertainty have seen the sharpest rise in five years.

Moves in financial markets and risk appetite among CFOs are closely correlated. Both react to similar factors and financial markets directly influence corporates, for instance through the availability and pricing of capital. Equities sold off in the third quarter, with emerging markets seeing the largest outflow of capital since the financial crisis. With UK equities down 18% in the last three months there has been a parallel loss of risk appetite among the UK’s major corporates. The proportion of CFOs who think now is a good time to take risk has dropped to 46%, down from 59% in the second quarter and a peak of 72% a year ago. Rising risk aversion is feeding into a more defensive stance on the part of major corporates, with a greater focus on cost reduction and rather less on investment.

Despite the recent more emollient tone by Western central banks, CFOs see the prospect of tighter monetary policy in the UK and the US as the greatest risk facing their businesses.

From the Bank of England’s point of view this may be the worst of both worlds – a corporate sector which is worried both about the prospect of higher interest rates and slower global growth.

The slowdown in emerging markets now ranks joint second, together with concerns about euro area growth, on CFOs’ list of worries. Against a backdrop of flagging business confidence the recent moves by the Bank of England and the US Federal Reserve to signal that interest rates are likely to stay lower for longer look well judged.

The firms on the CFO Survey panel are large and have heavy overseas exposure, with more than half of their revenues coming from outside the UK. While external risks are centre stage, CFOs are positive on prospects for the UK economy. CFOs rate uncertainty and emerging market weakness as constraints on investment but see the state of the UK economy as being a significant support for investment.

The UK’s recovery from recession has been punctuated by a series of external shocks, of which weakness in emerging markets is the latest. A strong pound and weaker demand in emerging markets dim prospects of an export-led recovery - and put greater weight on domestic demand to drive UK growth.

Chart 1. Uncertainty% of CFOs who rate the level of external financial and economic uncertainty facing their business as above normal, high or very high

45%

55%

65%

75%

85%

95%

15Q3

15Q2

15Q1

14Q4

14Q3

14Q2

14Q1

13Q4

13Q3

13Q2

13Q1

12Q4

12Q3

12Q2

12Q1

11Q4

11Q3

11Q2

11Q1

10Q4

10Q3

J1723 sr CFO Survey Q3 2015.indd 1 15/10/2015 13:15

| 7Property IQ – Q4 2015 Where next for UK real estate?

Key contactsJulian StocksHead of UK Markets+44 (0)20 7303 7210jstocks@deloitte.co.uk

Philip ParnellHead of Valuation+44 (0)20 7303 3898pparnell@deloitte.co.uk

Anthony DugganHead of Real Estate Strategy+44 (0)20 7303 3134 aduggan@deloitte.co.uk

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

Deloitte LLP is the United Kingdom member firm of DTTL.

This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.

© 2015 Deloitte LLP. All rights reserved.

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198.

Designed and produced by The Creative Studio at Deloitte, London. J2883

8 | Property IQ – Q4 2015 Where next for UK real estate?