FULL REPORT
The UK economy witnessed a record-breaking fall of 20.4% q-o-q in the second quarter. As a result, the UK is facing the deepest recession since the Great Depression and one of the worst in Europe. It is worth noting the UK spent more of the quarter in lockdown than its neighbours. The later lockdown also means it took the UK much longer to get daily case numbers under control. Furthermore, the UK is a predominately services-led economy, a sector that was impacted greatly because of the restrictions imposed. As a result, the UK economy is now 22.1% smaller than it was at the end of 2019.
Several countries have now published the first GDP estimates for the second quarter. However, due to the difference in the timings of lockdowns, it makes more sense to compare the cumulative falls in GDP over the first half of the year.
On a cumulative basis over the first half of 2020, the UK economy fell by 22.1%. This was more than double that of the US, which witnessed a fall of 10.6%. The French economy declined by 18.9% cumulatively, with the German economy falling by 11.9% over the same period.
The monthly July data will reflect the lifting of the remaining restrictions. Moreover, it seems that government policies, such as the stamp duty cut and the ‘eat out to help out’ programme, are having the desired effect. Looking ahead, Q3 growth will break records, with growth of 15.5% anticipated, partly due to the unprecedented extent of the decline seen in Q2.
However, there are a number of downside risks to the outlook, the looming expiration of the post-Brexit transition period and a potential second wave of infections.
The next round of talks start on 7 September, however hopes for a smooth transition to a full agreement are fading. The EU ideally want a deal agreed by October, which would leave enough time for approval by the EU27 and the European Parliament. The UK has said it will not extend talks if an agreement cannot be reached by December.
If the UK is unable to come to an agreement with the EU at a time when the recovery is fragile, this could stall any recovery this year and spill over into next year, impacting the rebound in 2021.
The tentative recovery that took hold in June has continued into Q3. A number of high-profile assets in Central London have transacted at or close to pre-COVID-19 pricing. Preliminary investment data shows that office investment volume for Q3 to date has already reached parity with the whole of Q2.
In the logistics sector, aggressive bidding for Prologis’ “Platform” portfolio took pricing 10% over asking to c. £480m, a sub-5% yield. This highlights the depth of investor conviction in the UK’s ever-growing e-commerce market.
With investors keen to make up for lost time, and with year-end in sight, we should see activity continue to pick up over the next few months, especially with most of the global bond market yielding below 2%. That said, downside risks will continue to weigh on investor sentiment, such as the risk of a second wave of COVID-19, continued debate over the future of office spaces, and growing uncertainty over a final Brexit deal. We have therefore updated our year-end volume forecast to £35bn, a £5bn increase on our previous forecast but still a 26% drop on 2019. We expect volume to recover to £45bn in 2021.
While the outlook for the retail sector continues to be challenging, we are starting to see the beginnings of distress-led sales that will help fuel a pricing correction in the market. For example, the coming administration sale of intu Trafford Centre, last valued at £1.67bn, could help usher in a much-needed re-basing of shopping centre values and encourage the stock turnover the sector arguably needs to evolve.
Indeed, embryonic signs of structural change are starting to emerge. Use Classes Order reforms, due to come into force this week, will give
landlords renewed speed and flexibility to adapt to changing market conditions, with huge implications for the future of high streets.
It is also clear that our relationship with the office is changing. Recent survey data from PWC suggests 86% of UK CEOs believe the remote working trend will endure, with work becoming "something people do rather than a place to go to". Almost no one is advocating a future without offices, but our business districts will have to be increasingly flexible in a changing world.