The economy and property markets in 2014
OAS breakfast, November 28th 2013
savills.com
Global economy is improving (mostly)
 USA
 Banks are lending
 Consumers have stopped precautionary saving
 Austerity programme less damaging than UK
 Medium term energy self-sufficiency?
 Labour cheap
 BRICS
 Was slowing growth inevitable?
 China – not that much wrong
 Russia – virtually everything wrong (transparency, governance, oil price, law,
corruption)
 Brazil – tight fiscal policy, how much has recent growth been due to US QE, needs
more reform
 India – most worrying, needs lots of reforms, tough to do business in
Global economy is improving (mostly)
 Japan
 New economic policy holds out some hope for growth
 But new consumption tax could cancel out the benefits of QE
 Eurozone
 Little hope of growth as a region
 Continued widening between core and fringe
 Big theme
 Interest rates, tapering, QE and what
happens if the economies haven’t reached
escape velocity when central banks act
EUROZONE GDP
UNITED STATES GDP
(indices; 2007 Q1 = 100)
105
(indices; 2007 Q1 = 100)
105
Eurozone
North*
USA North
East *
100
100
USA South
East**
95
95
Eurozone
South**
90
90
2007
2009
2011
2013
* Germany, Benelux, Austria, Finland. ** Italy, Spain, Greece, Portugal.
2007
2009
2011
2013
* ME, NH, VT, MA, CT, RI, NY, NJ, PA, DE. ** SC, AR, AL, TN, GA, MS, LA, FL.
Until June I could have recycled this slide for the third
year....
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
UK Consumer Confidence Index
... But something happened to Britain this summer
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
Source: GfK,
Q4 80
Q4 81
Q4 82
Q4 83
Q4 84
Q4 85
Q4 86
Q4 87
Q4 88
Q4 89
Q4 90
Q4 91
Q4 92
Q4 93
Q4 94
Q4 95
Q4 96
Q4 97
Q4 98
Q4 99
Q4 00
Q4 01
Q4 02
Q4 03
Q4 04
Q4 05
Q4 06
Q4 07
Q4 08
Q4 09
Q4 10
Q4 11
Q4 12
Annual House Price Growth
Annual House Price Growth
30.0%
80%
75%
20.0%
70%
10.0%
65%
60%
0.0%
55%
-10.0%
50%
45%
-20.0%
40%
Source: Savills, Nationwide
Surplus Net Income after House Purchase
House price growth undoubtedly had something to
do with this
Affordability
85%
Are the chattering classes impacting on sentiment?
Total real growth over period
UK
PCL
Difference
82 - 93
20.4%
29.5%
9.1%
93 - 05
122.7%
145.2%
22.5%
Since 05
-19.3%
65.9%
85.2%
Source: Savills
Source: RICS
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
New Instructions
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Is this worrying or exciting?
New Buyer Enquiries
70
60
50
40
30
20
10
0
-10
-20
-30
-40
-50
-60
-70
The housing recovery becomes more national from
2014
Assuming no
further changes
in the taxation
of high value
property
2014
2015
2016
2017
2018
22.7%
Prime London
4.5%
-0.5%
7.0%
5.5%
4.5%
22.7%
Prime Regional
4.5%
Source: Savills Research
5 years
to end
2018
1.0%
5.0%
5.5%
5.0%
Jan 05
May 05
Sep 05
Jan 06
May 06
Sep 06
Jan 07
May 07
Sep 07
Jan 08
May 08
Sep 08
Jan 09
May 09
Sep 09
Jan 10
May 10
Sep 10
Jan 11
May 11
Sep 11
Jan 12
May 12
Sep 12
Jan 13
May 13
Sep 13
% Balance
But the UK recovery isn’t just about housing
Services
Source: Markit/CIPS
Manufacturing
70
65
60
55
50
45
40
35
30
People are less worried about losing their jobs
UK: Gfk/NOP consumer confidence unemployment expectations
% balance
80
70
60
50
40
30
20
10
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source : Haver Analytics
And consequently are saving less
8.5
8.0
Saving ratio %
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
Q1 Q2
2010
Source: ONS
Q3
Q4
Q1 Q2
2011
Q3
Q4
Q1 Q2
2012
Q3
Q4
Q1 Q2
2013
Sep 13
Jan 13
May 12
Sep 11
Jan 11
May 10
Sep 09
Jan 09
May 08
Sep 07
Jan 07
May 06
Sep 05
Jan 05
May 04
Sep 03
Jan 03
May 02
Sep 01
Jan 01
Average earnings (incl bonus) %pa
But earnings growth is still weak
10
8
6
4
2
Private sector
Public sector
0
-2
-4
Companies are also planning on spending
UK: Investment intentions
% balance
40
30
Service sector
20
10
0
-10
Manufacturing sector
-20
-30
-40
1996
1998
Source: BCC
2000
2002
2004
2006
2008
2010
2012
So, the outlook is for faster and more balanced growth
UK: Contributions to GDP growth
%pts
4
Consumer spending
Investment
Govt. consumption
Inventories
Net trade
3
2
1
0
-1
-2
19972007
2012
Source : Oxford Economics
2013
2014
2015
2016
2017
What could go wrong?
Political risk
 USA
 Debt ceiling reached again (Mar/June 2014)
 End of QE
 Europe
 Default hasn’t gone away
 What happens when Greece doesn’t need the EU’s money?
 UK
 The real housing crisis?
 Households take on more debt to fund house moves
 Higher housing activity drives up consumer spending and GDP
 Unemployment goes below 7% faster than expected
 Inflation rises and then rates rises
 More debt and earlier rate rises lead to financial stress?
 Vote winners – mansion tax etc
What does this mean for office markets in the UK?
Rising leasing volumes everywhere
M25
35
30
25
20
15
10
5
0
Source: Savills
Avg:
4.6m sq ft
Regional cities (top 7)
Central London
4.0m sq ft
9.5m sq ft
And a return to a normal split between London and the
regions
30,000
25,000
£m
20,000
15,000
10,000
5,000
0
Source: Savills
Rest of UK
London
Regional spread is still interesting (as is
prime/secondary)
West End (Avg 5.07%)
Regional (Avg 6.47%)
10%
400
9%
350
8%
300
250
7%
200
6%
150
5%
100
Source: Savills
01/13
01/12
01/11
01/10
01/09
01/08
01/07
01/06
01/05
01/04
01/03
01/02
01/01
01/00
01/99
01/98
01/97
01/96
01/95
01/94
0
01/93
3%
01/92
50
01/91
4%
Spread bps
Yield %
WE/Reg spread bps
Three key themes for UK offices over the
next five years
savills.com
Theme 1 – The return of the empowered employee
 Employment is at a record high
 Significant questions around immigration
 Employers have got used to not raising salaries – can they compensate with workplaces?
 Employees (especially graduates) might start having a choice of employer again
 ... Once again the workplace will be a tool to attract and retain talent
What is important to employees?
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Comfort of work area
Temperature
Lighting
Length of commute to work
General noise levels
Space
Kitchen
Smell
Security
Quality of wireless technology
Public transport connections
Car parking
Internal fit out (bespoke)
Availability of meeting rooms
Proximity to shops
Break out area
Environmental/ green policies of the company (e.g. recycling)
Variety of local retail/ leisure offering
Proximity to green space/ parks
View from the workplace
Canteen/ café
Colour
Green space / roof terrace
Office art/ greenery
Environmental performance (“Green” rating) of the building
Showers/ changing facilities
Ability to work from a variety of locations within the building
Proximity to leisure facilities
Bicycle storage
Clustering of similar businesses in local area/ networking opportunities
Gym
Social area/ bar
External building design (newly built)
Crèche
Smoking area
Games room
Prayer room
Source: Savills, YouGov
What is important to employees in London?
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Comfort of work area
Length of commute to work
Temperature
Public transport connections
General noise levels
Lighting
Space
Kitchen
Security
Smell
Quality of wireless technology
Proximity to shops
Internal design/ fit out
Availability of meeting rooms
Variety of local retail/ leisure offering
Proximity to green space/ parks
Break out area/ quiet room
Environmental/ green policies of the company (e.g. recycling)
Proximity to leisure facilities
Colour
Office art/ greenery
View from the workplace
Showers/ changing facilities
Canteen/ café
Environmental performance (“Green” rating) of the building
Green space / garden/ roof terrace
Bicycle storage
Clustering of similar businesses in local area/ networking opportunities
Ability to work from a variety of locations within the building
Car parking
External building design
Gym
Social area/ bar
Crèche
Smoking area
Games room
Prayer room
Source: Savills, YouGov
The return of the empowered employee:
Implications for the market
 SME demand, unwilling self-employed and part-timers
 In-movers to CBD’s e.g. Telefonica, Amazon, Jacobs
 The return of the softer factors – social, place, environment
 Transport hubs: travel costs, housing costs, rising fuel prices
 The workplace as home space?
Theme 2 – Austerity
 Public sector cuts will continue to bite nationally
 Retail is still dealing with structural change
 Some occupiers will want to be seen as austere, others will have no choice
 Implications:
 Stronger demand for the fringe than the core
 Some businesses will drift out-of-town for great buildings
 Rise of blingteria
Theme 3 – TMT, tMT, mobile, big data, bricks versus
clicks, gamification, social media
Technological change
Implications for the market
 Generally over-forecast, occasionally under forecast
 Not a bubble, a fact of life
 Workplaces and outside spaces shouldn’t be a barrier to adoption
 Tenant demands are no more homogenous than Professions or Finance
 Creatives create the buzz that others aspire to
Final thoughts
 The recovery is underway and there are even some upside scenarios
 The “new normal” isn’t as new as many would like you to believe
 The next decade in offices will again be about people and places
 Watch out for:
 Electioneering politicians
 Rising rates
 Sustainability shocks