IN BRIEF UK COMMERCIAL PROPERTY UPDATE AND OUTLOOK May 2021

geraldeve.com/services/research MAY UPDATE

All Property quarterly total return continued to rally in April, driven by a surge in the industrial sector back to the heights of its 2017/18 previous peak of the market. Some of the largest recent investment deals were distribution warehouses, though investors also continue to target 20.5% -52.5% 7.5% 1.4% 1.0% 5.3% UK life sciences. Read more for the most recent multi-let May workplace visits, 2021 GDP forecast 2021 CPI forecast 2021 10-yr bond yield 2021 unemployment annual total return below pre-pandemic forecast rate forecast occupier and investment updates, economics baseline data and property forecasts. Surge in industrial returns

All Property quarterly total return continued to rally and hit 2.6% in sold seven retail parks to private equity firm Brookfield Quarterly total return by sector April, which was the strongest since February 2018. At the All Property for £330m in April to pay down debt and it completes the retail Source: MSCI level rents have stabilised and the performance was again driven by landlord’s disposal of its retail park portfolio. Centrica Pension Fund % positive yield impact on capital values. bought a David Lloyd centre in Northwood for £51m in one of the 8 6 largest leisure deals of 2021 so far. Leisure quarterly total return 4 Once again this was driven by the industrial sector that surged in continues to be increasingly positive and reached 1.4% in April, driven 2 April back to the heights of its 2017/18 previous peak of the market. by yield tightening. 0 This reflects the “frenetic” 2021 investment activity described by -2 agents now showing up in the valuations metrics of MSCI. The Office quarterly return continued to effectively flatline at around zero -4 London multi-let average equivalent yield hit a new low of 4.17% in in April as it has done all year, with the sector still to reveal how it will -6 April, with the annual total return now in excess of 20%. UK-wide position itself post-lockdown. However, this aggregate figure does -8 -10 distribution warehouse yield tightening similarly returned over 18%, disguise a divergence in returns over the past year, contingent on Jul-17 Jul-19 Jul-18 Jul-20 Jan-21 Jan-19 Jan-18 Oct-17 Apr-17 Apr-21 Oct-19 Apr-19 Oct-18 Apr-18 Jan-20 Oct-20 set against moderate rental growth of only 2.6%. income length. Returns on London office assets with relatively longer Apr-20 income have held up, whereas riskier shorter income has skewed into Retail Office Industrial All Property Some of the largest investment deals of April and early May were negative territory, as shown in the chart. distribution warehouses – the roster includes £144m for the JLR site in Solihull, £110m for Next Group’s distribution centre in South Strong investor appetite for UK life sciences continued into Q2. London office annual total return by remaining lease term Elmsall, a £103m portfolio of speculative sites across the East Midlands Harrison Street and Trinity Investment Management’s joint venture to Source: MSCI bought by NFU Mutual and ASI’s £100m purchase of the Amazon-let buy BioCity Group for £120m included a portfolio of 12 science park % Hinckley 532 building. properties totalling almost half a million sq ft in Nottingham, 6

and . AXA IM also recently purchased the Sherard Building on 4 Retail continued to make steady gains overall in April and quarterly Oxford Science Park for a rumoured £23m. total return increased to 1.1%. This is still a one-horse race, however, 2 with retail warehouses quarterly total return improving every month 0 since May 2020 to reach 2.9% in April. Meanwhile shopping centres -2 and high street returns have remained constant at around -4% and % £330m -4 -2.5%, respectively. London20.5 multi-let annual Largest April deal, -6 total return Retail Portfolio Mar-19 Jul-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21

Longer Leases Shorter Leases

geraldeve.com/services/research Segments

12-month return to April 2021 Source: MSCI % 20

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-40 London UK distr All SE ROUK Supermarket All Lon/SE City Retail ROUK Midtown & All ROUK SE All Leisure London ROUK SE Shopping multi-let w’house Industrial multi-let multi-let Property office parks office warehouse office parks WE office Office standard office office Retail high street high street high street centres industrial industrial Income return Rental growth Yield impact Total return

geraldeve.com/services/research UK economy

UK GDP surprised on the upside and increased by 2.1% month- As expected, base effects from energy prices and unusual seasonal on-month in March, which limited the Q1 lockdown quarterly pricing patterns in the clothing sector shifted the annual CPI inflation economic contraction to just -1.5%. The reopening of schools on rate to 1.5% in April, up from 0.7% in March. This temporary increase 7.5% 1.0% 2021 GDP forecast 2021 10-yr bond yield forecast 8th March was linked with higher scores on mobility indicators and is set to continue for the next couple of months. Broadly though an upward trend of spending on credit and store cards. Q1 2021 sits disinflationary pressures should prevail and household spending in stark contrast to the -19.5% contraction in Q2 2020 under the first power will be further supported by low inflation, with CPI forecast to lockdown. It also means that GDP in March was ‘only’ 5.9% below its stay below the 2% target over the next few years. % % pre-pandemic level. 20211.4 CPI forecast 20215.3 unemployment rate forecast

As for Q2, non-essential retail and outdoor hospitality reopened on 12th April, boosting retail sales to an incredible 42% up on a year The monthly monitor earlier. Spending on clothing and footwear was triple the figure of Source: Bank of England, European Commission, IMF, ONS Two-year trend Latest figure April 2020. Consumer confidence increased to its highest in over GDP annual growth 1.4% a year and the recent 17th May further relaxation of lockdown to Unemployment rate 4.8% include indoor hospitality will drive further gains. Oxford Economics Consumer confidence -9.7 forecasts UK GDP to grow by an increased 5.7% quarter-on-quarter Retail sales growth 42.4% in Q2 and has again revised its forecast for GDP growth in 2021 to Retail sales % online 29.4% 7.5%, up from 7.2% last month. Manf output growth 4.8% Continued fiscal support will be a key influence, with most of the Brent crude (USD/bbl) 64.70 highly stimulatory Covid-related support schemes due to remain Gold (USD/oz) 1,709 in place until the autumn. Demand for labour should be recovering by the time that the Job Retention Scheme is withdrawn in FTSE100 7,018 September. The latest ILO unemployment figure showed another CPI inflation 1.5% tick downwards to 4.8% and the expectation is that it will still rise 10-year bond yield 0.9% but to a downward-revised forecast of 5.3% by the year-end. This is EUR/GBP 1.15 only 1.5 percentage points above its pre-pandemic rate at end-2019. USD/GBP 1.38 Two-year trend Latest figure Jul-19 Jul-20 Apr-21 Apr-19 Jan-21 Jun-19 Oct-19 Mar-21 Feb-21 Jan-20 Dec-19 Jun-20 Sep-19 Apr-20 Oct-20 Nov-19 May-19 Aug-19 Feb-20 Nov-20 Dec-20 Mar-20 Sep-20 May-20 Aug-20

geraldeve.com/services/research Spotlight on… London office recovery

London Office, monthly take-up Occupier activity still hesitant and erratic Law firms continue to drive occupier activity Source: Gerald Eve ‘000 Office take-up increased 25% in Q1 2021 to 1.4m sq ft but this was still The professional services sector has been the most active occupier 1400 less than half the 5-year average of 3.1m sq ft. Monthly take-up data group so far in 2021, accounting for 32% of all market activity. 1200 in Q2 has so far given no further indication of a meaningful recovery Law firms have been key with a 200,000 sq ft pre-let commitment 1000 in the lettings market. The 562,000 sq ft taken-up in April was a from Latham & Watkins at 1 Leadenhall, and Sullivan and Cromwell’s positive sign and the strongest figure in nine months. However, renewal of 67,000 sq ft at 1 New Fetter Lane. As a subsector, law firms 800 activity to 18th May has been limited with only 119,000 sq ft signed, have made up 61% of all professional services take-up and accounted 600 requiring an additional 683,000 sq ft to be let in the remainder of for just under a fifth of all central London office occupier activity in 400 Q2 to reach even the Q1 activity level. 2021 so far. Law firms have been active during previous downturns 200 to take advantage of property market conditions, but this time 0 Jul-20 Jan-21 Apr-21 Feb-21 around the case is even stronger, given concerns over the potential Jan-20 Jun-20 Mar-21 Oct-20 Apr-20 Feb-20 Sep-20 May-21 Dec-20 Mar-20 Aug-20 Nov-20 May-20 operational security implications of long-term home working. Monthly take-up 3-month moving average

Workplace visits still very muted but now above December London workplace visits, below pre-pandemic baseline 2020 (pre-third lockdown) peak Source: Google mobility data % % 32 19 % Mobility data show that visits to workplaces in Inner London during Professional services take-up Legal sector take-up 40

May were still less than half of their pre-lockdown baseline level. 45

The trend over 2021 has been an increasing one, however, in line 50 with the lifting of certain lockdown measures on 8th March and 55 12th April, and as larger proportions of the population have been % 2m sq ft -52.5 60 vaccinated. Given these factors, the proportion that have returned Central London office May workplace visits, take-up YTD below baseline 65 is still extremely muted and it appears that most are waiting until 70 after 21st June, when it will become clearer how occupiers intend 75 to position themselves once all restrictions are lifted. 80

85 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21

geraldeve.com/services/research Outlook

All Property total return is forecast to return to a positive and be Total return and components by sector 9.4% in 2021, slipping back to 6.9% in 2022. This will be driven in Source: Gerald Eve, MSCI the short term by industrial as yields tighten further in H1 2021, and Retail Industrial as retail and leisure pricing stabilise and contribute positively again % % in some cases in H2 2021. 15 25 1.2% 8.0% 10.5% 10 20 5 There will be sustained underlying strength in the industrial 0 13.8% 6.0% 6.1% market, especially in London and the South East. The current late 15 -5 cycle surge in investment activity and pricing will boost total -10 10 return in 2021. An uncertain outlook for consumers and businesses -15 following the unwinding of lockdown government support late in 5 -20 2021 will inevitably lead to at least some small increase in voids, -25 0 meaning total return is forecast to slip back in 2022. 2015 2016 2017 2018 2019 2020 2021 2022 2023 2015 2016 2017 2018 2019 2020 2021 2022 2023

Headline office rents are expected to deteriorate more rapidly in Office All Property 2021 as the return to the office better evidences the occupier fallout % % from the lockdowns. Thus some further yield softening in the short 20 15 term is expected – particularly for secondary assets that pose 9.4% 6.9% 7.4% 15 greater operational and ESG issues. 10 2.8% 6.8% 6.9% 10 5 5 should experience some further but smaller fall in rents and Retail 0 more moderate outward yield shift in 2021. A non-negative annual 0 -5 total return in 2021 driven by retail warehouses will be the first since -5 2017. By 2022 total return should increase to be relatively competitive -10 -10 against other sectors, boosted by a large income return component. 2015 2016 2017 2018 2019 2020 2021 2022 2023 2015 2016 2017 2018 2019 2020 2021 2022 2023

Income return Rental growth Yield impact Total return

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Research Other research publications STEVE SHARMAN BEN CLARKE OLIVER AL-REHANI Partner Senior Associate Senior Research Analyst [email protected] [email protected] [email protected] Tel. +44 (0)20 7333 6271 Tel. +44 (0)20 7333 6288 Tel. +44 (0)20 7518 7255

Capital Markets Agency Valuation JOHN RODGERS MARK TROWELL RICHARD MOIR Prime Logistics Bulletin Prime Logistics Report Life Sciences Gerald Eve Sustainability Partner Partner Partner Q1 2021 Q1 2021 Q1 2021 July 2020 [email protected] [email protected] [email protected] Tel. +44 (0)20 3486 3467 Tel. +44 (0)20 7333 6323 Tel. +44 (0)20 7333 6281

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