Midweek property news update - 12 May
The inflation sell off, house prices accelerate and London heads back to the office
5 minutes to read
For a concise outlook for all the major real estate sectors, spanning residential, offices, capital markets and retail, see our new House View feature. Updated monthly by our research team this is your go to snapshot of the trends that matter.
The return to work
Britons are spending more time in the office. Morgan Stanley's tracker suggests UK workers spent more than 40% of their time at their usual place of employment last month compared to a third back in February. In London, office sensors company Metrikus puts that figure at close to 50% as recently as last Wednesday.
Earlier this week Goldman Sachs issued research suggesting its clients watch developers well positioned to capitalise on the recovery and the divergence in demand between old and new office buildings. The investment bank believes prime office rents will be within 3% of pre-Covid levels by 2022.
Our own forecasts have most submarkets across the capital returning to growth by 2022. That's when rents in the City Core and West End, for example, will climb 5.8% and 4.1%, respectively, according to Knight Frank's London Research Partner Shabab Qadar.
The pace of the return to offices is dependent on working culture in local markets as well as infection rates. The FT finds a transatlantic rift is opening up between US and European banks, for example. In Asia, most office markets remain subdued, though like other major markets rental declines are likely to decelerate as the economic outlook improves, according to Stephen Wong, Knight Frank's man in Singapore.
The inflation sell off
For several weeks now global forecasters such as the OECD have been raising growth forecasts and the prices of raw materials have been soaring as economies reopen. See yesterday's news that prices charged at the factory gate in China are rising at the fastest pace in three and a half years.
Speculation all this will fuel inflation to the degree that global central banks will withdraw massive fiscal stimulus and begin raising interest rates has been rife throughout. Uncertainty spilled into stock markets yesterday, sending shares tumbling.
Pressures are being felt most in the US. Officials at the Federal Reserve are seeking to reassure investors that any surge in inflation is "transitory" and will ease once imbalances in supply chains and jobs markets return to more normal levels.
Outgoing Bank of England chief economist Andy Haldane has also expressed concerns that consumer spending maintained at current levels will take inflation well over the Bank's 2% target later this year. Figures from Barclaycard released yesterday revealed consumer spending is back above pre-pandemic levels for the first time this year.
House price growth accelerates
The recovery continues to support activity in the housing market. Annual house price growth reached 8.2% in April, the strongest annual price growth rate in 5 years, according to Halifax. You can read more on this in a new monthly update from Chris Druce.
The strength of the housing market amid an economic crisis has understandably left some people scratching their heads - the FT yesterday canvassed economists as to why the OBR's initial predictions of an 8% drop in house prices never materialised.
The mass revaluation of working and living habits continues to fuel activity and resilience of the jobs market have been crucial factors, as have ultra-low interest rates. As Andrew Wishart, property economist at Capital Economics tells the FT, the average effective mortgage rate is currently below 2%, down from about 6% in 2007.
That's a neat illustration as to why the current debate over inflation matters for UK property markets. Financial markets are forecasting the base rate will begin to rise next year, albeit slowly, which will support further growth. You can see our latest house price forecasts here.
The Queen's Speech
Planning played a central part of yesterday's Queen's Speech. The proposals include those trailed by the Times earlier this week that include zoning areas into areas marked for "growth" and others marked "protection".
Knight Frank head of planning Stuart Baillie is sceptical that zoning will meaningfully speed up planning decisions anywhere other than in specifically defined regeneration areas. You can read more thoughts from Stuart on the speech here.
A brighter European outlook, continued...
After a slow start, the now rapidly accelerating pace of vaccinations across Europe is transforming economic sentiment, as we discussed earlier this week.
Investor morale across the eurozone is now at its highest level since May 2018, according to a new poll from Sentix. Meanwhile during a speech last night, European Central Bank policymaker Klaas Knot suggested conditions are beginning to track those in the US and the UK, namely that consumers are gearing up to spend excess savings and service-sector activity is reviving in line with the experiences of other countries.
Mr Knot said economic growth is now likely to overshoot the 4% expansion currently forecast by the ECB. The projections will be updated next month.
In other news...
In a new diary of an agent, Chris Druce finds international demand for London property is building in expectation of the end to international travel restrictions.
Post-pandemic economics and the role property can play in tax and succession planning is the theme of our next webinar for The Wealth Report 2021. The event starts tomorrow at 9am BST and will last 30 minutes. Sign up here.
Elsewhere - a new rule in California could help curb emissions at e-commerce warehouses, soaring house prices stoke fears of Canada ‘cost of living crisis’, Hong Kong property defies the gloomy forecasts, US employers struggle to find willing workers, UK students feel weight of jobless burden during Covid crisis, China bets on productivity over population growth, and finally, Jeff Bezos's new superyacht and the roaring big boat market.