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News Release


Jones Lang LaSalle's Commercial Property Predictions

Southampton, 6th January 2012 - Jones Lang LaSalle has published their predictions for the commercial property sector in 2012, at the end of a year in which the overall economy failed to rally both in the UK and overseas.
Michael Green, head of Jones Lang LaSalle’s Southampton Office commented: “Overall UK GDP for 2012 is likely to be just below 0.5%, suggesting that any meaningful recovery in the general economy will be delayed until 2013 at the earliest.  However we expect to see an improvement in sentiment from the summer of 2012 onwards, boosted to some degree by the focus on the UK during the Olympic Games in July.
"It is important to be careful not to over generalise on economic performance through, both in terms of sectors and geographical location.  London and the South-East, including Southampton and other South Coast conurbations have fared considerably better than other parts of the UK, and this north-south divide is likely to continue well into 2013.
Michael added: "In the South we have seen many businesses slowly and surely growing, improving both turnover and profitability, with a lack of available space, particularly in the industrial sector delaying their growth plans.  As this level of demand strengthens we will see a serious supply shortage in 2013/2014 before new schemes are capable of attracting funding and are then built out."
Jones Lang LaSalle also anticipates:
• Prime yields level off – after a decade of rapid compression prime property yields have levelled off at 5-6%.  Given the weaker short term outlook there is little prospect of further compression and prime yields are set to stay at their current levels during 2012.  However, the gap between property yields and other asset classes provides a cushion against renewed outward movement with interest rates set to remain low.
• Secondary gulf to widen – yields on secondary property across retail, office and industrial sectors, continue to move out and this polarisation is likely to intensify until market conditions improve.  Throughout the South very few secondary investments will achieve better than 10% yield in this market, with pricing once again based upon fundamentals of location, lease and tenant covenant.
• Over-supply in the retail markets – one of the major consequences following the end of a credit fuelled consumer boom is a significant over-supply of retail floorspace.  The UK average retail vacancy rate is 14.3% although in some less affluent conurbations the rat is closer to 20-25%.  The growth in on-line retailing will reinforce the need for structural change in many of our retail centres, which is currently the focus of research carried out by Mary Portas.
Up to 25% of existing High Street and Shopping Centre leases are due to expire by 2013, and 50% by 2015.  Those retailers that survive will be in the driving seat as they force rent reductions and more flexible lease terms from their Landlords.  Even then, the growth in on-line sales will mean that most mature, non-food retailers will be net reducers of space - sub optimal stores will be ditched and retailer requirements will gravitate towards fewer but larger retail outlets.
• Shortage of Grade A offices – whilst office vacancy rates will remain high, there will is currently a distinct shortage of Grade A supply in Southampton and the pipeline of new schemes has dried up.  This will have consequences, not least on the city’s ability to attract (or retain), footloose inward investors from the financial services and professional sectors. 
• Obsolescence - property obsolescence will increase in importance due to legislation, sustainability and occupier preference for modern stock.  Advances in technology will enable occupational flexibility and lower floorspace requirements. We expect to see a rapid devaluation in price for obsolete stock, probably after 2012, which in itself will create a greater opportunity for developers with refurbishment expertise, and significant problems for poorly advised holders of older stock. 

• Development wanted – to promote economic activity and help kick start the economy both central government and local authorities are encouraging new development.  All the signs are that they will continue their proactive approach toward policy reviews including planning reform, business rates and spatial City planning; whilst enterprise zones and infrastructure improvements will offer more visible action.
• Development opportunities – contractor tender prices are likely to remain low, presenting great opportunities for cost effective projects including new build and refurbishment.  Conventionally, developers use downturns to line up planning permissions for the upturn, however, the major cost of securing such consents will mean that only the strongest developers can indulge in this activity.  Development will eventually return, but not as we know it. 
• Cash is king – We expect cash to be king again in 2012, as last seen in 2009 when our financial system locked down, confidence was weak and risk aversion increased.  Bank funding is likely to be highly selective with credit committees rightly demanding a high level of due diligence, before making any commitments at conservative LTV ratios.  With a scarcity of debt in the market, traditional property investors will struggle to compete with cash purchasers.  The increased supply of distressed assets released from bank de-leveraging will continue to offer significant opportunities.
With caution still the key note, the upturn will be driven by structural demand or pre-lets from companies recently starved of quality supply.  The property market recovery will accompany this gradual thaw with core assets in strong locations being the first priority.  The underlying divisions between prime and secondary will remain wide the structural changes facing certain aspects of our market are not fully played out yet.
Overall, 2012 will start slowly but should see a strong final burst to lift hopes for 2013.