News on 04 January 2001

The property market remains strong overall but there is a growing divergence between market sectors and regions, with a strong office sector and weaker retail sector. This divergence is expected to increase in 2001. These are the key conclusions of a twice-yearly survey by the CBI and property advisers GVA Grimley.

Growth over the past six months in the office sector has been the strongest in the six-year history of the survey. The gap of 20% between companies which have increased their property holdings (28%) and those which have reduced their holdings (8%) is the highest since the survey began.

In contrast the retail sector's performance was one of the weakest on record. It had recorded the highest figure of all sectors in ten of the previous 12 surveys, but the balance has now declined from 57% in November 1999 to just 9% in this survey.

A balance of 25% of companies said they expect to increase their office holdings over the next six months. This is the highest balance recorded on this question since the survey began. It contrasts with a balance of 5% for firms expecting to increase their retail property holdings. Over the life of the survey the average balance for retail property has been 24%.

Overall, firms in all sectors continued to increase holdings over the past six months. Thirty seven per cent took on more property while 10 per cent reduced their holdings. The balance of plus 27 per cent compares with 20 per cent recorded over the preceding six months. Looking forward there was a positive balance of 31 per cent, suggesting a slight strengthening of the market.

There is a very clear division in the relative performance of the property markets in the UK regions. With the exception of the South West and Wales, all regions have recorded fairly healthy balances for increases in property holdings over the last six months. The big difference is in companies' expectations. The South East (including London) and Scotland are the only regions where firms are more positive about the next six months than the last. This ties in with other evidence on the performance of the property market. It suggests that the strongest levels of demand are being experienced in central London, the M4 corridor and the central belt in Scotland.

Stuart Morley, Head of Research at GVA Grimley, said: "Office rental growth is accelerating and retail rental growth is slowing. The survey results reflect this trend with a marked difference in occupier demand between the two sectors. This is set to widen further over the next six months with the highest projected increase in office holdings since the survey began. Office demand is strongest in London and the South East which helps explain why this area is by far the most buoyant in terms of property optimism."

The most important constraint on property-related capital expenditure remains the shortage of suitable property. This constraint has grown in importance since the survey began and has been the most important for the last three surveys.