Grimley - Property Returns Set To Peak This Year

Date: 21 Aug 1997

Property Returns Set To Peak This Year

A new research document, "The Economy and the Property Market", published this week states that rental growth has risen above inflation for the first time in seven years.

The report by Grimley, International Property Advisers, shows economic output in quarter 2 is 3.4% higher than a year ago, well above its long term trend of 2.1 % pa, yet well below 1994 or late 1980's levels. This high growth has bolstered the commercial property market, where strong occupational demand has pushed rental growth to above the rate of inflation.

Stuart Morley, National Head of Research at Grimley said, "Strong economic growth this year is likely to be followed by a slowdown in 1998 and 1999, due to higher interest rates and the deflationary July budget. A severe downturn or recession, as some have suggested is not, in our view, likely,

Occupational property demand is strong and rents are now rising in real terms, the first time in this decade. We expect the rate of rental growth to increase over the next 18 months with attractive double figure investment returns in 1997 and 1998."

The Grimley index in the report shows prime rental growth has increased to 7.3% pa well above the IPD average index of 3.4% pa (see graph). Growth in each of the three sectors is far from uniform however.

Retail Sector
In the retail sector growth has been highest out-of-town and in larger town centres. For example, over the last 12 months the Grimley database shows high growth in Oxford Street (+17%) and Bond Street (+20%) in Central London but much lower or zero growth in London suburban centres. Similarly there has been strong growth in Oxford (+ 1 8%), Norwich (+31 %), Birmingham (+12.5%), Bristol (+11 %), Manchester (+20%), Leeds (+11 %), Newcastle (+16%), Glasgow (+15%) and Edinburgh (+10%), but lower growth in many, but by no means all, smaller centres.

Office Sector
In the office sector there has been very strong rental growth in Central London, weaker growth in some South East towns, but little or no growth in other regions. For example, over the last 12 months prime rents have increased 19% in Mayfair, 36% in Covent Garden, and 12.5% in the City core but have not increased in Birmingham, Leeds or Edinburgh.

Industrial Sector
In the industrial sector there has been no geographical pattern with many areas recording no growth in rents and some areas showing slight growth.

Improving rental growth and lower (post election) long term gilt yields (7% now compared to 7.7% at the end of April) have improved property investment demand, lowered yields slightly and pushed up returns, much as predicted in our recent bulletins. The IPD all property return rose to 12.2% pa in June from 10.7% pa in March. Over the last three months the annualised return was higher still at 14.8%.

Grimley's latest forecasts for rental growth and investment returns in 1997 and 1998 have increased slightly from their last forecast. (shown in the table)

	1995   1996   1997   1998
Prime Rental Growth	2.9%   5%   9%   9%
Average (Prime & Secondary) Rental Growth	0%   3.1%   7%   9%
Total Returns	3.3%   9.6%   15%   13%

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