Source: Markit Economics

UK commercial property development rose for a third consecutive month, according to October survey data from property consultants Savills.

Around 26% of survey respondents noted an expansion over the month, compared to less than 12%, who signalled a fall.

At +14.3% in October, up from +11.6 in September, the resultant net balance, the Total Commercial Development Activity Index, was the highest for twenty-seven months.

Private sector activity, which saw a deeper fall than public sector activity during the downturn, continued to lead the rebound in October. Private sector office and retail development registered particularly marked rises over the month.

In the survey, produced by Markit Economics, commercial developers are reported to remain optimistic that activity will rise in the next three months.

However, at +8.4 in October, the net balance measuring the three-month business outlook was the lowest since July.

Confidence was strongest regarding retail and leisure and industrial/warehouse activity. Business sentiment was only just in positive territory for office development over the next three months. Reports from survey respondents suggested that improving economic conditions had supported optimism in October, but the availability of bank lending remained a concern in the sector.

Six of the nine areas of commercial development monitored by the survey registered growth in October.

The strongest rises were in private sector retail and leisure, followed by work on private sector office development projects. Meanwhile, latest data signalled that public sector new build was the worst performing area of development. Lower levels of activity were also recorded in office fit-out and public sector retail and leisure activity during October.

Commenting on the October survey, Mat Oakley, head of Savills' Commercial Research department said: "The recovery is still fragile and we would concur with our respondents' concerns about the availability of bank finance for speculative development. Until tenant demand begins to recover and vacancy rates fall, we expect lenders to remain cautious about projects with no pre-let in place."

According to the IPD UK Quarterly Property Index, the 1.5% positive capital growth recorded over the third quarter was the largest quarterly figure since Q4 2006.

In the QandA session at a recent conference, IPD Co-Founding Director Ian Cullen, asked Gary Sherwin, Head of Retail Investment at Land Securities, why Retail Warehouses are always the first market segment to recover after a property recession. Sherwin answered: “Retail warehouses appeals to a wider variety of investors, have low tenant failure and we have seen some good news flow from dominant tenants in that sector recently. The improvement has been led mostly by small lot size deals.

“From solitary offers at the turn of the year, to now having several bids to choose from on assets for sale, this has fed through to improved pricing in the third quarter. Improvements in the number of banks willing to lend up to £50m has also helped. As a result, overseas investors, including sovereign wealth funds, as well as domestic institutional investors are coming back.”Retail capital growth was 2.1% over Q3.

Behind Retail, the Industrial sector’s capital growth over the third quarter was 1.5% - - level with the all property average. Simon Jenkins, First Vice President of Development at ProLogis told delegates the return of the occupier market was the principal the cause for improvement. “We still, though, expect next year to be tough,” he cautioned.

Jenkins continued:“Occupiers are taking advantage of particularly good deals which the threat of empty rates has created – as landlords we have an even greater imputes to get tenants in, fuelling the move towards shorter and more flexible leases in the process. Yields, though, still need to come down further.”

UBS Portfolio Manager Sam Sananes explained the enduring popularity of central London and West End offices despite their volatility. He told delegates: “The weak sterling has driven overseas investors in - - UK central London offices seem good value and there has always been an appetite for offices among that investor base. Domestic investors will more gradually start to show more interest as the rental story improves, which I expect it will.”

Colliers CRE said this week that investment volumes remain subdued, although yields have fallen due to the sheer weight of money chasing limited product. Demand for prime secure income has given way to an appetite for riskier assets. Funds are under pressure to increase property allocations, due to fund inflows and equity market buoyancy requiring asset weight rebalancing.

By value, investment volumes are limited; £1.6bn in October, down from £2.3bn in September. The market may have accelerated in the last few weeks, but this is not yet reflected in the data. Considerable ‘off-market’ activity is reported. Net real estate lending fell again over Q3 09 by £1.7bn, with overall lending exposure to property steady at 11.8% of all commercial lending.

Colliers CRE latest forecasting is for total returns of –7.3% during 2009 and an almost unchanged forecast of 5.0% in 2010.