The JLL and Glenigan UK Commercial Construction Index

The JLL and Glenigan UK
Commercial Construction Index
Q2 2014
Construction activity expands
The inaugural JLL/Glenigan Commercial Construction Index confirms
that the UK’s economic recovery continues to strengthen.
Work began on some £22.7 billion of commercial projects over the 12
months to June 2014, a year on year increase of 6.6%. This demonstrates that
developers are responding to rising corporate confidence and in particular, there
has been a notable increase in demand for high quality, modern, attractive spaces
that can drive greater productivity and staff retention.
Construction had been underperforming as a component of GDP until relatively
recently, but in Q1 output rose by 1.5%, ahead of general GDP growth of 0.8%.
Annual growth stood at 6.7%, compared to 3.0% for the economy as a whole.
The JLL/Glenigan index suggest that this will continue, although a possible
slowdown in residential development – which is not included in these figures –
may counterbalance this.
However, the volume of commercial space being started has not yet risen
substantially since the recession and is still significantly behind the position before
the crisis, as the graph below shows. There is evidence of an increasing supply
shortage, particularly in the office market, and the amount of development needs
to accelerate if this is not to hamper the recovery in the longer term. JLL Research
suggests that the availability of finance is still the major issue.
Refurbishment projects (£10.8 billion) saw a slightly larger increase of 8.7% perhaps unsurprising, given the recent uptick in demand, as these projects can be
brought to market more quickly and with more certainty. However, most of the total
is still composed of new build schemes (£11.9 billion, up 4.7%).
25
20
15
10
5
0
2000 Q1
2000 Q3
2001 Q1
2001 Q3
2002 Q1
2002 Q3
2003 Q1
2003 Q3
2004 Q1
2004 Q3
2005 Q1
2005 Q3
2006 Q1
2006 Q3
2007 Q1
2007 Q3
2008 Q1
2008 Q3
2009 Q1
2009 Q3
2010 Q1
2010 Q3
2011 Q1
2011 Q3
2012 Q1
2012 Q3
2013 Q1
2013 Q3
2014 Q1
New starts – annual total (£bn)
Fig 1: UK
Commercial
property
construction
volumes
New build
Source: Glenigan/JLL
Refurbishment
The picture
across the UK
London is easily the strongest single contributor,
accounting for almost a quarter of the entire
UK total at £5.5 billion. Remarkably, the volume
of new starts continues to accelerate strongly,
with the total for the capital 27.2% ahead of this
point in 2013. Clearly, with construction as with
other parts of the economy, London’s recovery is
perhaps 12-18 months ahead of the rest of the
country.
Significant projects over the past three months
include the refurbishment of the Selfridges
department store on Oxford Street, Stanhope’s
280,000 sq ft 1 Angel Court office scheme in
EC2 and the Crown Estate’s refurbishment of St
James’ Market (340,000 sq ft).
SCOTLAND
billion
£1.90
15.2%
Nevertheless, Northern Ireland saw the strongest
increase (209%) but this is from a very low base;
the yearly total of £0.7 billion also reflects the
disproportionate impact of large single projects
such as the GAA stadium in Belfast. However,
Wales and Scotland also saw a substantial
increase in new starts over the 12 months in
question.
NORTHERN
IRELAND
billion
£0.69
208.5%
NORTH EAST
billion
£0.77
YORKSHIRE
& HUMBERSIDE
£1.74
billion
-12.7%
7.3%
NORTH WEST
billion
£2.40
-2.2%
£bn Total construction
billion
£1.01
The Yorkshire total was buoyed by a number
of significant starts over the past three months,
such as the Flemingate redevelopment in
Beverley and Central Square, a 220,000 sq ft
office scheme in Leeds.
12.7%
WALES
EAST OF
ENGLAND
£1.09
£1.38
65.1%
billion
billion
-11.3%
LONDON
£5.46
billion
27.2%
SOUTH WEST
£1.64
-5.7%
SOUTH EAST
£2.58
billion
Increase/decrease
compared to year
end Q2 2013
-15.0%
billion
%
£2.03
starts by value,
year to end Q2
2014
EAST
MIDLANDS
billion
WEST
MIDLANDS
The picture is much weaker for the English
regions outside London, where new activity
fell by 6.3% over the 12-month period to £13.6
billion. Perhaps surprisingly, the southern regions
saw a greater slump than elsewhere; indeed,
the only increases were seen in Yorkshire
& Humber (£1.7 billion, 7.3% up) and East
Midlands (£1.0 billion, 12.7% up).
-11.6%
RETAIL
LEISURE
MEDICAL
EDUCATION
3.3%
£2.00bn
18.1%
£6.20bn
19.1%
£3.26bn
£2.69bn
0.1%
19.2%
£2.33bn
OFFICES
-23.6%
INDUSTRIAL
7.7%
£3.69bn
£2.52bn
The sectors:
Retail sees biggest increase
COMMUNITY
Year to Q2 (£bn) • % change on Q2 2013
Of the main commercial sectors, retail was
the leading improver, with new project values
increasing by 19.2% to stand at £2.3 billion.
Alongside the Selfridges project mentioned
above, the total for the twelve months to
June also includes the refurbishment of the
Mailbox in Birmingham (Q4 2013), as well
as Westfield’s restarted Broadway Shopping
Centre in Bradford (Q1 2014), which also
buoyed the Yorkshire total highlighted above.
While still below historic levels of
development, there are signs of life in the
pipeline. Following a relatively buoyant 2013
(Trinity Leeds, Whiteley Village Hampshire,
Wembley Designer Outlet), further select
developments will come to the market in
2014 and 2015 (Old Market Shopping Centre,
Hereford and Grand Central, Birmingham),
which will impact the retail hierarchy in these
locations. On a wider UK perspective, city
centre developments are re-emerging, with
Crawley, Oxford and Bracknell joining the
Bradford scheme mentioned above.
Looking forward, the appetite for direct
development and indirect development
funding is likely to increase as investors
seek modern retail schemes with longer
income, and real potential for rental growth.
Developers may look out of town, to locations
that are easier to develop, have great
transport links, and the flexibility and space
to enable the development of new destination
‘power centres’, to perform the role of new
regional retail centres.
However, offices, at £3.7 billion, still
represent a far more significant slice of work,
and activity rose by a very respectable rate of
7.7% over the period, higher than for the index
as a whole. Looking over the longer 12-month
period, this total includes some major starts in
the City of London and surrounds, including
Derwent London’s White Collar Factory
(293,000 sq ft) as well as Land Securities’
schemes 1 New Street Square (260,000 sq
ft) and New Ludgate (379,000 sq ft). These
projects also helped produce the large
increase seen in the capital, although all were
dwarfed by the start on the relocation of the
American Embassy from Grosvenor Square
to Battersea. However, other cities also saw
significant office projects begin, including
Mountgrange and M&G’s One West Regent
Street in Glasgow (143,000 sq ft) and Salmon
Harvester and NFU Mutual’s Two Glass Wharf
(100,000 sq ft).
Fig 2: UK commercial
construction volumes
by sector
Fig 3: Speculative development in Birmingham,
Manchester, Leeds, Bristol, Glasgow and
Edinburgh, by year of completion
10
3000
8
2500
7
2000
6
000s sq ft
Annual project value (£bn)
9
5
4
3
1000
2
500
2000 Q4
2001 Q2
2001 Q4
2002 Q2
2002 Q4
2003 Q2
2003 Q4
2004 Q2
2004 Q4
2005 Q2
2005 Q4
2006 Q2
2006 Q4
2007 Q2
2007 Q4
2008 Q2
2008 Q4
2009 Q2
2009 Q4
2010 Q2
2010 Q4
2011 Q2
2011 Q4
2012 Q2
2012 Q4
2013 Q2
2013 Q4
2014 Q2
1
0
1500
Offices
Industrial
Retail
Source: Glenigan/JLL
While this is encouraging, the rate of increase
needs to accelerate. There is an urgent need
for more office space, particularly in London
and the major regional cities. Indeed, much of
the shortfall in construction activity compared
to the early to mid 2000s is the result of the
lack of activity in this sector – as the chart Fig
2 shows.
According to JLL, Grade A vacancy rates
are below 2% in the West End, Manchester,
Bristol and Leeds. Across the Big 6 there is
1 million sq ft of office space currently under
construction speculatively, compared to a
peak of 2.5 million sq ft in 2009. This is shown
in the chart Fig 3 above.
In the aftermath of the financial crisis,
development completions in the Central
London office market have been well down
on historic averages, reflecting both weaker
demand and a shortage of credit. From early
2013 however, there has been a rapid pick-up
in confidence across the wider economy,
leading to the release of pent-up demand for
office space and a jump in take-up levels,
exposing a significant shortfall of new supply.
The vacancy rate in the West End has now
fallen to 3.2%, the lowest since 2001. In the
City, supply has temporarily been boosted
by the completion of some large schemes
including The Leadenhall Building
(610,000 sq ft), but the development pipeline
0
2007
2008
Completed
Leisure
2009
2010
2011
2012
2013
2014
2015
2016
Under construction
Source: JLL
is limited over the next two years. Occupiers
are responding to the scarcity by pre-letting
well ahead of their actual occupation, leading
to rapid erosion of the speculative supply
pipeline. The shortfall is set to become acute
from 2015.
Volumes in the industrial sector fell back by
23.6% to £2.5 billion. This reflects the fact
that a major government facility, as well as
a number of large automotive facilities in the
West Midlands, were started over the twelve
months to 2013. This hides an underlying
upward trend in the remainder of the market.
Indeed, JLL’s market statistics show that
starts, particularly for speculative space, are
accelerating, particularly in the distribution
space; at the end of Q1 2014 there was 7.1
million sq ft under construction, compared
to 2.1 million sq ft a year previously. As of
February 2014 the amount of industrial space
being speculatively built had risen by 182%
over the year.
This trend should continue given the wider
revival in the industrial sector as well as the
ongoing need for retailers to reconsider their
logistics facilities as the impact of multichannel retailing becomes more apparent.
Activity within the Hotel and Leisure sector
remained relatively flat at £2.7 billion. This
includes major projects in Bournemouth and
Aberdeen which involved significant hotel
components.
This total should increase over coming years
reflecting the ‘leisurefication’ of shopping
centres, with catering options in particular
taking up a greater share of shopping centres
and high streets.
There are currently just over 30,000
new hotel rooms actively in the pipeline.
Aberdeen currently has the largest room
pipeline relative to current supply (+17.3%),
followed by Newcastle (+14.4%), Manchester
(+12.8%) and Glasgow (+11.3%). Manchester
already has a relatively high room supply
(approximately 14,800 rooms), suggesting
that developers and operators anticipate
strong demand growth in the city. The figures
imply further increases in hotel construction
later this year.
The medical and education sectors
brushed off austerity to see a continued rise
in activity – 19.1% and 18.1% respectively.
Major hospital projects at Kings College, St
Bernards Southall and the Royal Orthopaedic
Hospital Stanmore also helped the London
total detailed above.
Summary
Commercial construction is clearly beginning to revive, but it is still
lagging the wider economic recovery. The provision of modern,
attractive offices, industrial premises and shopping and leisure
facilities is clearly essential if businesses’ growth plans are not to be
constrained, with implications for the whole economy. It is however
evident that there are already pressures building, particularly in London
and the other major cities where the availability of grade A space
is reaching very low levels, especially in the office market. There
are signs that development is accelerating but far more needs to
commence over the next few months.
Contacts
Helen Gough
Lead Director
JLL Buildings & Construction
+44 (0)20 7087 5090
helen.gough@eu.jll.com
Robert Davis
Content Director
Glenigan
+44 (0)1202 786 707
robert.davis@glenigan.com
Jon Neale
Head of UK Research
JLL
+44 (0)20 7087 5508
jon.neale@eu.jll.com
Allan Wilén
Economics Director
Glenigan
+44 (0)20 7715 6433
allan.wilen@glenigan.com
The new quarterly JLL/Glenigan Commercial Construction Index
is aimed at tracking the construction of commercial property and
its contribution to the wider economy. As a vital leading indicator of
construction trends, the next few quarters’ results will demonstrate
whether this revival is beginning to occur.
Glenigan
JLL Buildings & Construction
Glenigan is the trusted provider of project data, contract leads
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