Savills plc
Report and Accounts 2007
Savills Marketplace Overview
UK
Commercial
Retail and industrial/distribution tenant demand remained positive during 2007. Steady demand in regional office markets continued throughout the year, particularly for Grade A space. In the Central London office market, while levels of leasing activity were well above average in the first three quarters of 2007, there was some caution in the final quarter of the year. While we have seen little evidence of requirements being eased as a result of the credit squeeze, it is clear that banking sector tenants are less certain about the future than they were a year ago.
In the second half of the year, the investment markets in the UK were hit hard by the credit squeeze, with debt-backed purchasers significantly less active than they have been in recent years. Transactional activity was driven by equity investors, both domestic and international. The relatively low levels of transactional activity have made it hard for investors to ascertain the degree to which yields have corrected and some element of valuation lag is further complicating this.
Barring any major external shock in 2008, we expect tenant demand outside the London office markets to remain stable and heavily biased towards Grade A buildings and locations. Until the credit squeeze has eased demand for Central London offices is likely to remain subdued. However, given the current low levels of vacancy in this market we do not believe there will be a significant downward correction in the rents on Grade A buildings.
Once the credit squeeze has begun to ease, we expect a gradual pick up in the volume of capital market transactions across the UK commercial property market, with investors continuing to focus on opportunities that offer the prospect of above average rental growth. Cross-border investors are expected to continue to view the UK as an attractive investment market due to its landlord favourable lease structure, high levels of liquidity and transparency.
Residential
The UK mainstream residential market started 2007 strongly. However, five successive interest rate rises had a progressive impact upon price growth and market activity over the course of the year. Annual UK house price growth, which peaked in the middle of 2007, fell by the year end, as tightened affordability was compounded by the fallout from the credit squeeze. Markets in the South East proved the most resilient to the slowdown, with no noticeable impact upon rates of price growth being evident in London until August, when buyer confidence was hit by poor economic news reports and accessibility to mortgage finance became more constrained. As confidence dipped, so did market activity. Turnover in the new homes market was noticeably down in the last quarter, as demand from buy to let purchasers and other investors tailed off.
Prime markets performed strongly in the first half of the year, with annual house price growth at the very top end of the Central London market reaching 29% in June, fuelled by record City bonus payouts and strong overseas demand. Price growth in the rest of prime Central London ended the year at slightly over 16%, even after accounting for a 2% fall in prices in the last quarter, which occurred as a result of uncertainty in the City and reduced earnings expectations amongst those employed in the financial sector.
The 2008 market is expected to be characterised by low turnover and flat house price growth. Further cuts in interest rates, a freeing up of capital markets and some reassurance that the taxation of non-domiciled residents is not going to be too onerous, will be critical to the performance of the sector in 2008.
Europe
Tenant demand for commercial property across Europe remained steady for most of 2007. Occupiers in all sectors were, however, more selective on location, with a heavy preference towards prime properties. While the credit squeeze raised questions about the prospects for banking sector demand there has been little evidence of tenant requirements being put on hold. Looking ahead we expect leasing activity to remain stable in 2008 unless there is a major external shock. Occupiers in the retail and distribution markets will continue to focus on locations that deliver high profitability per square foot. Occupational demand for offices will remain heavily skewed towards Grade A properties.
In the investment markets, following a strong first half to 2007, volumes have been restrained by the credit squeeze. Debt has become harder to obtain, and debt-backed buyers have consequently been less active. Equity investors have remained active across Europe, focusing on both trophy investments and rental growth opportunities.
Investors in Europe in the second half of 2007 were focusing on Grade A properties in the office, retail and industrial sectors with secondary properties being increasingly difficult to sell. Investors’ main focus continued to be Germany where the potential for sustained rental growth continues to attract investors, both domestic and international. Looking forward to 2008, general activity in the European investment markets will be constrained until there is a greater availability of debt from the banks.
We expect investors to continue to focus on France, and Paris in particular, where yields for prime office and retail have proven resilient and where there remains significant demand for good quality, well let office buildings.
In Spain, there appears to be concern that the residential markets have been overpriced but there is still a very active commercial market with investors believing that 2008 will provide some interesting buying opportunities.
We believe that there will be increased interest in the Nordic region as some of the countries there begin to attract increased investor demand.
The Netherlands market has remained resilient throughout 2007, and in 2008 to date, with many of the Dutch banks being largely unaffected by the credit squeeze. We see this market attracting significant investor interest in 2008 in both the retail and office sectors.
Asia
In 2007, Asia was largely unaffected by the credit squeeze with investor and occupier markets continuing to perform strongly. Upward economic momentum remained. Local and international investors were particularly active during 2007 and a considerable weight of institutional funds targeted the region. Yield compression and a limited stock of available properties created a challenging operating environment for investors and forced many to look further afield to second tier markets for opportunities.
In the prime office markets, corporate expansion at a time of generally limited supply drove rents up. In the retail markets, growing visitor numbers and rising household incomes generated strong consumer demand amidst constrained supply levels, especially at the top end of the market.
Residential markets performed well with some evidence of moderating price growth after a year of rapid gains. In China, measures were being taken to cool the economy and curb inflation and may act to cool the market in the near term.
US
In the second half of 2007, with the advent of the subprime credit issues, buyers and sellers became more cautious and the credit markets became significantly more restrictive resulting in costlier debt and slowing sales volumes. The subprime credit squeeze and its ensuing effects on consumer confidence, construction starts, unemployment and GDP had a significant impact on commercial property. While the overwhelming majority of subprime loans are related to single family home mortgages, the fallout spread to the commercial lending sector. We expect this sentiment to continue into 2008.