This time last year, we predicted that demand for commercial property would grow during 2016, and so it was proven. Demand, coupled with the anticipated increase in supply, has combined to result in one of Allsop’s largest annual commercial auction totals of £610million, some 33% above our 10 year average of £450million.
As we look forward to 2017, it is worth reviewing the end of 2016 and some of the fundamentals of the commercial property market, which remained largely unchanged over the year.
Interest rates and the returns available to savers remained – and continue to remain – low. Many are predicting an increase this year, but will a doubling of base rate to 0.5% really affect values that much? Undoubtedly, the cost of borrowing is starting to increase but, with so many cash buyers in our market, we see no reason for demand from private investors to diminish substantially.
Over the course of 2016, the economy continued to grow despite some dire predictions of economic disaster. As a result, rental values in the majority of the southern half of the country have been gently rising, along with selected locations in the North. However, rental growth has not been enjoyed across the whole country, with rents remaining static or indeed falling in some areas of the North West, North East, Wales and Scotland, particularly as the number of voids has increased. The ‘heat map’ on page 11 clearly illustrates the variances in yields achieved across the country.
Were it not for the business rate revaluation, which is due to be implemented on the 1st April 2017, we would have expected rental growth to continue to tick slowly upwards. However, the rating revaluation is going to produce some hefty increases in rates bills, particularly in the better locations, which could well act as a brake on rental growth. Conversely, of course, there will be areas that will see rate reductions, which may act as a catalyst for rent increases.
Whilst inflation has not been a word which has appeared too often in the press over recent years, it looks as though inflation is on the rise, seemingly caused by the increase in oil prices and also a weakening currency. As a result, we feel any index-linked properties will be more keenly sought-after over the course of 2017.
In the forthcoming year, there will undoubtedly be some nervousness in the financial markets around the end of March, when Article 50 is finally triggered and negotiations start in earnest for our departure from the EU. Sentiment in the secondary property market may be affected in the short term, in the same way as it was at the time of the Referendum. Yet, unless interest rates rise substantially, which no one is predicting, we see no real reason for the commercial property auction market to be adversely affected by any minor tremors in the financial markets, particularly for the better-quality lots. As always, a little uncertainty can bring opportunities.
At our December sale, we detected a slight cooling of demand for the secondary properties and those let on shorter leases in weaker locations – a trend we feel is likely to continue into the new year. This slowing, in both investor and occupier demand, could lead to a readjustment in pricing for the weaker lots. We still envisage strong demand for properties located in London and the South East, but cannot at present see any reason for yields to fall further, especially as residential values are growing more slowly.
In summary, we are cautiously optimistic about the prospects for 2017 and do not anticipate any let-up in demand for well-located properties in the first quarter. The rising incidence of shorter lease commitments has a more modest effect in strong locations, although we expect further cooling in demand for more secondary and tertiary locations.
We would be surprised if the 2017 total sales volume surpassed 2016’s figure; however, with a notable increase in the number of larger lots now being offered at auction and procrastination again creeping into private treaty sales, it might not be too far short!
Thank you to all our clients and buyers for their support in 2016 and we look forward to working with you again in 2017.