Midweek property news update - 26 May
London's offices, the ketchup economy and D-Day for green mortgages
5 minutes to read
The outlook for London's offices
London office leasing hit 1.2m sq ft during the first three months of this year, a rise of 6.7% compared with Q4 2020. That's still considerably below the 10 year average of 3m sq ft, according to a new Knight Frank report. Take-up is now 40% below pre-pandemic levels and on a rolling annual basis continues to fall, but the rate of decline has eased.
It's clear occupiers remain cautious about the near-term outlook, however activity levels are strengthening. There have been three deals in excess of 390,000 sq ft so far this quarter, of which the largest was a 150,000 sq ft transaction. An additional 2m sq ft of space under offer across London, with a third going to technology, media and telecoms companies.
The data continues to highlight a looming shortage of best-in-class space. Our analysis of the development pipeline data shows about 19m sq ft of space will complete between 2021 and 2023, of which 27% is already pre-let. That leaves about 14m sq ft of speculative space available, though 6.4m sq ft of that space comprises of pipeline schemes that haven't yet started and may not complete during the next three years.
That then leaves just 7.5m sq ft of speculative space under construction and compares to a three year average take-up of new and refurbished space of about 15m sq ft.
The inflation debate
New data suggests the recovery is taking hold - businesses are now more confident about hiring than at any time since 2016, according to a survey by the Recruitment & Employment Confederation. Retailers' investment intentions for the year ahead are rising at the fastest pace since 1994, according to a survey conducted by the CBI.
Inflation, which hit 1.5% in April, is likely to continue to gather pace over the coming months as consumer spending picks up. When giving evidence to MPs on Monday, Bank of England governor Andrew Bailey maintained that inflationary signs will pass once temporary imbalances of supply and demand right themselves.
These imbalances stem largely from lockdowns throwing supply chains out of whack and changing spending patterns, which is fuelling rising prices of shipping and a raft of raw materials. There will, according to global policymakers, be a moment all this corrects itself, which could even have a deflationary impact. The FT's Martin Sandbu uses a ketchup analogy to explain the risk:
"You can shake and tap all you want, with no result — until suddenly it all comes flooding out and your food is smothered."
Interest rates and UK housing
Transitory or not, markets are predicting the Bank of England will raise interest rates as early as next year. Flora Harley this morning suggests five reasons why the housing market is well positioned to move into an era of rising interest rates.
Most compelling, perhaps, are bank margins. Lenders increased their margins in 2020 in response to heightened economic risks, most notably at higher LTVs. The average spread for 2-year products at 90% LTV is 1.2% higher than it was before the pre-pandemic. While this has improved in recent months, it remains at its highest level since 2015, which suggests any increases in the base rate could be absorbed by banks narrowing the spread due to a brighter economic outlook.
Green mortgages
Back in November the government published a consultation that could lay the foundations for a new era of green mortgage lending. Officials have so far struggled to address how to 'green' existing housing stock and, as I said last month, attractive finance could be the factor that impacts the incentives of homeowners enough to truly move the needle.
The consultation focussed largely on two parts - firstly, would lenders be willing to disclose portfolio-wide Energy Performance Certificate (EPC) data and the gross value of their lending for energy performance improvement works. Secondly, would lenders commit to a voluntary, target based approach for improving the energy performance of their lending portfolios.
It looks like the answer was yes. The Telegraph reports homes will be expected to achieve an energy performance certificate (EPC) rating of C or above from 2030, under plans to be set out within weeks from the Department of Business, Energy and Industrial Strategy.
"To achieve this, the Government has outlined plans to require mortgage lenders to attain higher EPC ratings across the average of their portfolio from 2025," the piece states. "Homes that do not reach higher ratings could face more expensive mortgages, or losing value on their property."
In other news...
Two upcoming webinars...
First up, the share of global commercial real estate transactions backed by private capital has grown significantly over the past decade and investors are increasingly taking a much greater interest in ESG considerations. The team delve further into these trends this morning at 9am. Register here.
Secondly, we explore the themes emerging from the London Tall Buildings Survey 2021 and discuss how developers and town planners are responding to changing market conditions and evolving planning policies. The event takes place on June 10th at 9am. Register here.
Elsewhere - Rishi Sunak faces fresh pressure to cut taxes as borrowing falls, Vonovia upends German apartment market with $23 billion deal, Helical looks forward to the ‘five-star’ office experience, Britain’s trade with EU fell by a quarter after Brexit transition, France considers new border restrictions with the UK, gold hits a four month high, the uneven global recovery, and finally, European governments grow more optimistic on G-7 tax accord.