Commercial property still growing despite slowing economy

15 January 2008

Despite signs that the economy is slowing, occupiers of commercial property expect to expand their property portfolios on the back of continuing growth in output and employment over the next six months, the CBI/GVA Grimley Corporate Real Estate Survey reveals. But they don't take account of energy efficiency of the buildings they acquire.

The survey reveals that many firms are unaware of the requirement being introduced this year for landlords to obtain an Energy Performance Certificate (EPC) for their buildings. The largest buildings will need an EPC from April and the rest by October. Occupiers will need to be aware of them when acquiring or disposing of property but can make use of the information in their decision-making. Whilst three-quarters of businesses in the survey say they look at energy costs and the efficiency of buildings before they acquire space - 9 out of 10 do so in certain sectors - EPCs are a good way to judge a building's likely efficiency and running costs. Half of firms (51%) are either unaware or have not so far acted so communication over the next few months will be vital.

The twice-yearly survey, conducted between 24 October and 14 November, reveals 43% of firms expect to expand their amount of property space in the next six months, while 22% plan to reduce it. This balance of +21% is just below the rate occupiers expanded their space over the last six months (a balance of +22%).
However, firms in extraction and manufacturing sectors saw an overall contraction in property holdings over the last half year period and expect to continue reducing their property space in the next six months.

Banking, finance and insurance firms also expect to reduce their property slightly in the first half of this year (a balance of -2%) but, if unconstrained, half of businesses in this sector would contract their space, while only around a quarter would expand it - giving a much larger negative balance of -23%.

Howard Cooke, Director at property consultants GVA Grimley said: "The desire in the finance and manufacturing sectors to reduce property space can be attributed both to concerns about the impact from the credit squeeze over the next six months and the surplus space that these sectors traditionally carry.
But this survey does not support the speculation about a crisis in commercial property. Firms are still expecting to expand their property occupation much as they have in recent months. A watchful eye should be kept on how the coming changes to empty rate relief affect occupier behaviour, however, as these are likely to have some negative consequences."

Most firms (82%) believe that changes to the empty rate relief being introduced in April will have a negative impact. The government will scrap the 50% relief on business rates from which all non-industrial firms currently benefit three months after a property has become empty. Relief currently given to manufacturers of 100% in perpetuity will now last just six months. Whether or not the change has its desired effect of encouraging landlords to make more efficient use of empty properties, the cost to business is estimated to be nearly £1 billion a year1 and the decision could have other negative consequences.

Karen Dee, the CBI’s Head of Infrastructure said: "The higher cost of owning an empty building could make regeneration less viable and demolitions are likely to increase. Businesses can also get caught in leases, which make them liable for empty rates even when the property is no longer suitable and they cannot pass the property on."

The CBI has urged the government to relax its approach to empty property rate relief, before the regulations come into effect this April, by introducing an 18-month relief period to allow firms a realistic amount of time to dispose of empty property. The government must also commit to monitor the impact on levels of development and demolition. There is already evidence that development has been made unviable by the threat of these rates.

While location and costs are still the most important drivers in finding the right commercial property, the survey shows energy efficiency now ranks alongside public transport and design as a factor. Respondents say the most important benefits to business of choosing a 'greener' property are cost-savings as well as acting as a responsible business. Sixty-one per cent of firms would pay at least a little more rent for a sustainable building.

Firms were asked to what extent the UK's transport infrastructure affected their business. Most (61%) said it had a negative impact with businesses ranking road congestion as having the greatest impact. A fifth of companies would consider relocating their business from the UK. The most likely reasons for these firms doing so were 'political issues', the 'skills availability' and 'the regulatory regime'.

Hard copies of the survey are available to the media from the CBI, Centre Point, 103 New Oxford Street, London WC1A 1DU, tel: 020 7395 8239; it is also available from GVA Grimley, 10 Stratton Street, London W1J 8JR and at www.cbi/org.uk/bookshop or www.gvagrimley.co.uk