The Property Data Report is produced by the Property Industry Alliance annually, and sets out key facts about commercial property, a sector that makes up a significant part of the UK economy.
PROPERTY DATA REPORT NEWSFLASH 2018
The PIA is undertaking a major review of the Property Data Report methodology and available data sources during 2018. The Property Data report will therefore not be published in 2018. We apologise for any inconvenience this may cause. Further announcements will be made in early 2019.
PROPERTY DATA REPORT 2017
Commercial property is the physical platform for virtually all the UK’s major industries and enterprises, as well as providing places in which people work, shop and enjoy leisure activities. It comprises office blocks, buildings for shops and other high street businesses, warehouses and industrial units, as well as other types of buildings, such as cinemas, gyms, hotels, petrol stations, car parks and the like.
This latest Property Data Report has been fully updated to cover the period to the end of 2016. Amongst its detailed statistics, this report shows:
Amongst its detailed statistics, this report shows:
- The value of commercial property was £883 billion in 2016 representing 10% of the UK’s net wealth.
- Commercial property accounts for 13% of the value of all buildings in the UK.
- The value of the industrial sector increased in 2016, whereas the values of the office and retail sectors declined.
- Rents have increased at a slower rate than other business costs and turnover, particularly for retail.
- Property accounts for £183 billion (almost 6%) of insurance company and pension fund investments.
- The commercial property industry directly contributes over £14 billion in taxes to the national Exchequer.
- Commercial property contributed £63 billion (3.7%) to the total UK economy in 2016.
- The commercial property industry employs over a million people – 1 in every 32 jobs in the UK.
Property Data Report 2017
Value relative to other assets
Commercial property includes office blocks, buildings for shops and other high street businesses, industrial buildings (warehouses and most forms of factory) and other types of building, such as cinemas, gyms, hotels, petrol station, car parks and the like.
The total value of commercial property fell in 2016 to £883 billion. The fall, which occurred in the months following the EU referendum, reflected a lowering in the prices investors were willing to pay for a given rent.
To give some context, at £883 billion, commercial property’s value is comparable to the country’s stock of machinery, equipment and vehicles. It is the equivalent of around 40% of the value of both the UK stock market and of UK government gilts. Overall, commercial property accounts for about 10% of the UK’s net wealth.
Privately rented residential property accounts for a further 12% of the UK’s net wealth.
Value relative to the built environment
With a value of £883 billion, commercial property represents 13% of the built environment, which has a total value of almost £7 trillion.
Other non-residential buildings – mainly healthcare, hospitals, schools, colleges and universities – constitute just £147 billion, a fraction of the value of commercial property.
However, residential property dominates the built environment with a value of £5.9 trillion, almost seven times greater than the value of commercial property.
More than £1 trillion worth (19%) of the UK’s housing stock is privately rented, with reports regularly revealing that commercial property investors are showing increasing interest in privately rented residential property as an investable asset.
Retail – comprising shopping centres and out-of-town retail parks, as well as supermarkets, department stores and high street shops – is the largest commercial property sub-sector, accounting for 38% by value in 2016. Offices are the second
largest sub-sector and London offices dominate this group, representing 65% of the total value of offices in the UK (but only a quarter of the total floorspace).
Hotels form the largest part of the fast-growing ‘other commercial property’ sub-sector.
Overall, London commercial property accounts for 38% of the UK industry’s total value, far greater than the 23% share of GDP that London generates. It is worth noting that London’s share of commercial property has grown from 26% in 2004, mainly because property values have nearly doubled. Elsewhere in the UK, however, values have increased by only 10%.
Values over time
Since 2000, the value of the UK’s commercial property stock has grown by an average of 3.0% each year, compared to RPI inflation of 2.8%.
All other parts of the built environment have grown at a faster rate than commercial property. In particular, the value of housing has grown much more quickly, at 6.7% each year, reflecting greater increases in both prices and the volume of housing.
It is notable that the supply of commercial property, measured in terms of floorspace, has grown by only 0.5% over the last 10 years. By contrast, the number of houses and flats in the UK has increased by over 7% during this period.
Renting versus owning
55% of the UK’s commercial property (by value) is rented rather than owned by occupiers. This is in contrast to residential property, where almost two-thirds of homes are owned by occupiers.
With many businesses increasingly reluctant to commit capital and management time to owning the property they use, and with high demand from investors for commercial buildings, renting grew significantly during the last decade.
The proportion of commercial property that is rented, however, has stabilised since the global financial crisis.
Having been in decline up to the early 2000s, the renting of homes has since grown, mainly because of a doubling in the number of privately rented homes, which now account for 19% of the value of the UK’s total housing stock.
Most privately rented homes are owned by small landlords and private property companies, but mainstream commercial property investors are increasingly interested in privately rented residential property as an investable asset.
The terms and conditions of rented commercial properties, including lease lengths, are negotiated by the landlord and occupier.
The average lease length is now seven years, having fallen substantially since the 1980s (when terms were typically 25 years). However, lease lengths have slowly increased from their late 2000s recessionary low of just six years. Furthermore, around two-fifths of leases have break clauses, which allow the lease to be terminated early, and occupiers benefit from rent-free periods at the start of the lease averaging 7.4 months.
The retail sub-sector has experienced the most pronounced shortening in lease lengths, reflecting the preference among many, especially smaller, occupiers for greater flexibility in their property commitments. Other occupiers, particularly bigger businesses and those in better quality buildings, continue to prefer longer leases because of security of tenure as well as high initial fit-out costs. Longer leases are in turn encouraged by investor landlords, who seek long-term income security.
As a business cost…
At £19 billion, the cost of renting office space in 2016 was 9% of office occupiers’ staffing costs. The rental costs to retailers, at £20 billion, were a third of the
level of staff costs.
Business rates, on average, add almost 40% to the current cost of renting retail and office property, although the burden across occupiers has become uneven in recent years.
…and compared to inflation
Commercial property rents, overall, have increased at a much slower rate than other business costs over the last 10 years and below the rate of RPI inflation.
There is a contrast, however, between the retail sector, where rents have barely changed over the last 10 years, and offices, where rents have grown relatively quickly due to the buoyant London market over this period – although this growth has still been below inflation.
Business rates have increased at a faster rate than rents and, on average, broadly in line with inflation. The divergence with rents is particularly substantial in the retail sub-sector due to negligible rental growth. Business rates in the retail sub-sector have also grown by more than the 2.5% per annum rise in sales turnover recorded.
Investors, as distinct from occupiers, now own £486 billion worth of commercial property in the UK, representing 55% of the total. This is the highest value to date, exceeding the previous peak reached prior to the global financial crisis.
UK institutions (insurance companies and pension funds) were historically the biggest direct investors in UK commercial property but now account for less than one-fifth of the total, down from a quarter in 2005.
In contrast, foreign investment in commercial property has increased rapidly over the last decade, and overseas investors now own 29% of UK commercial properties held as investments.
These estimates exclude housing and student accommodation, where large mainstream commercial investors own about £38 billion worth of such property – 31% higher than 2015.
In aggregate, UK and overseas collective investment schemes now own over a quarter of the amount invested in UK commercial property and represent the largest owner type, according to recent research by the IPF.
UK institutional investor exposure
Direct and indirect exposure to property accounts for around 6% of the £3 trillion of assets held by UK institutions (insurance companies and pension funds).
Direct ownership of buildings accounts for almost 2% of their total investments, remaining the primary way institutions invest in property. However, investors nowadays deploy a wider range of approaches than in the past.
Investments in collective investment schemes have grown, as larger investors use these vehicles to gain access to specialist skills, whilst smaller pension funds use them to gain exposure to an asset class previously accessible only to big investors.
Institutions also invest in property through their equity investments in Real Estate Investment Trusts (REITs) and other listed property companies.
It is worth noting that insurers also increasingly provide debt finance to other property investors. Estimates by De Montfort University (DMU) indicate that lending by insurance companies and their (largely institutionally-backed) fund management arms increased by over 50% between the end of 2012 and 2016.
Many occupiers and investors acquire commercial property using a combination of their own capital (equity) and debt. Many owner-occupiers also use their commercial property as collateral when borrowing for their businesses, according to the Bank of England.
There was a small increase in (net) lending in 2016. The Bank of England’s data, relating mainly to lending by British banks and building societies to private property companies, suggest an increase of 1% to £135 billion.
De Montfort University’s (DMU) latest survey, which covers lending secured on commercial investment property, shows a 2% rise in (net) lending by all types of lender to £165 billion in 2016.
The Bank of England and DMU data indicate lending is between one-third and a half lower than the exceptional levels recorded just before the global financial crisis. As a proportion of property values, lending has reverted to the relatively low levels of the early 2000s, indicating greater resilience than during the global financial crisis.
Traditionally, UK banks and building societies were the principal lenders to UK commercial property but their dominant position has been rapidly eroded in the years since the financial crisis. They now account for 47% of the value of outstanding loans,
compared to around two-thirds 10 years ago.
A broader range of lenders (such as insurance companies and debt funds) has emerged over the last five years. These nontraditional lenders accounted for 20% of new lending in 2016, a substantial increase from around 5% during the late 2000s.
Returns from investment in directly-owned commercial property fell to 3.9% in 2016, according to MSCI’s IPD® UK Annual Index. In contrast to 2015, these returns were poorer than UK equities and gilts. Property company shares also underperformed in 2016. Like all financial markets, commercial property’s investment performance is volatile, and, in tending not to be highly correlated with other asset classes, was slower to recover than other financial markets in 2016.
Over the longer term, directly-owned commercial property’s performance lies between the returns of gilts and equities. This is in line with surveys of investors’ longer-term expectations and with the historic pattern of risk – commercial property returns being less volatile than equities but more volatile than gilts.
Taxes paid to the national Exchequer
The commercial property industry is taxed in many ways. The direct contributions from some of these taxes – including Stamp Duty Land Tax (SDLT), VAT, PAYE and National Insurance Contributions – can be calculated with reasonable accuracy.
These taxes total nearly £14 billion, representing almost a quarter of the industry’s Gross Value Added. This is a greater proportionate tax burden than in the economy as a whole,
reflecting the taxation of property transactions through SDLT. Recent research for the BPF indicates that commercial property is taxed more heavily than residential property.
Occupiers also paid around £21 billion in business rates, much of which (according to research) was effectively borne by property owners through lower rents. Other direct taxes paid by the industry, such as Corporation Tax, business rates on empty property and the Community Infrastructure Levy, are much harder to assess.
The commercial property industry contributes to the UK economy in many ways. It finances and constructs new buildings. It invests in and manages the accommodation needs of retailers, businesses, distributors, manufacturers, hoteliers and many parts
of the public sector. It also maintains these buildings and facilitates the buying, selling and letting of such property.
In total, these activities directly contributed about £63 billion
to the economy in 2016 – representing 3.7% of the UK’s Gross Value Added.
Commercial property’s economic contribution is comparable to that of the UK’s telecommunications and transport industries combined, highlighting the sector’s importance to business and to people’s everyday lives.
The commercial property industry employs 1.1 million people, with the majority of these jobs involving the construction, development, repair, care and management of buildings.
Employment in the industry has recovered from its recessionary low of around 887,000 in 2010 but is still below mid-2000s levels. In particular, employment in commercial property development has remained low because of low levels of new construction.
The UK’s commercial property investment sector (investment and fund managers, REITs and property companies) is a small, but high value-added, part of the industry, and the largest in Europe. It generates over £400,000 value-added per employee – nine times the average for the economy as a whole.
ONS data show that the volume of commercial and industrial property construction edged up in 2016 but is still substantially below pre-financial crisis levels.
In general, however, new commercial property development is still substantially below mid-2000s levels.
By contrast, both infrastructure and housing construction have fully recovered from the late 2000s downturn and are posting volumes above their mid-2000s levels.
The commercial property industry has been adding an average of about 45 million square feet of new space every year in the last decade across the three main property sub-sectors, representing about 0.7% of the total stock of commercial property. This reflects a value (including the land) of around £11 billion – contributing almost 1% to the UK’s GDP each year.
Activity over the last five years, however, has been running at half to two-thirds the previous rate, particularly in the retail and office sectors.
Despite a growing population and economy, new construction is barely covering the loss of stock through demolition and change in use to residential. The net amount of commercial property floorspace has increased in total by only 0.5% over the last 10 years, according to the IPF’s The Size and Structure of the UK Property Market End-2016 Update.
Commercial property, excluding factories, accounts for about 9% of the UK’s energy consumption, with the heating and lighting needs of factories bringing the total to 10%. Other non-residential buildings, mainly schools, colleges and hospitals, add another 5%. By contrast, almost a third of the UK’s energy consumption occurs in the home. Transport is the country’s biggest consumer of energy.
Energy consumption in commercial buildings (and also in residential and other non-residential properties) increased slightly in 2016 on account of the colder winter.
Shops are the largest consumer of energy in the commercial property sector, reflecting not only a larger amount of space but also greater energy requirements per square foot.
88% of CO2 emissions are associated with residential buildings, transportation and industry, and commercial buildings account for a significant proportion of the remainder.
By contrast, commercial and other non-domestic buildings (excluding factories) account for only 12% of direct and indirect CO2 emissions, according to data published by the Committee on Climate Change.
Many commercial property investors are aware of the potential to positively impact on the UK’s climate goals by improving efficiency. Emissions from commercial buildings continue to fall once the effect of variations in winter temperatures is accounted for. This trend reflects the shift in power generation away from the use of coal towards renewables.
Definitions, sources and methodologies, and acknowledgements are available in the full report.