Capital growth is expected to be driven by rental growth as yield compression draws to a close with conditions for rental growth across the UK office and industrial markets looking favourable. In particular, we believe that London is further ahead in the rental cycle and that there is scope for the regional markets to play catch up. This is particularly evident in the industrial market where despite the recent recovery rental values in the regions remain below what could be expected by underlying trend. In contrast in London and the South East values are already running ahead of the underlying trend, suggesting that there is scope for stronger growth outside these markets. Furthermore, the low yields in London look most vulnerable to changes in interest rates and currency changes, and could experience some outward yield pressure. In contrast, prime yields in some regional centres are still above the previous peak and the spread between prime and non-prime yields remains wide and is far less compressed than in 2007, which offers some comfort around current pricing.
Alongside this, we expect the upcoming business rate revaluation to start to influence rental trends over the next 12 months, and are likely to support stronger growth in the regional markets. London is anticipated to see a significant increase in its rate liabilities, with JLL estimating that rate bills in some emerging London office centres will more than double. While existing occupiers will be supported by transitional relief, those looking to take new space will not. In contrast, liabilities in the big six regional cities are likely to remain broadly flat. A higher rate bill can be expected to put pressure on rental values, subdue further rental growth and make lower cost locations more attractive.
While retail is anticipated to lag the wider market overall once again in 2016, we see selective opportunities in this sector this year. Retail locations that have a high proportion of leisure use which underpin footfall from “10 to 10” can be expected to outperform, including the restaurant sector. Furthermore, retailers are beginning to adapt to the multi-channel environment driven by changing technology. While this means continued retailer demand in these destination locations for physical stores that showcase the brand we also see opportunities within retail warehousing, where the combination of larger units, ease of access and good car parking should mean it is well placed to benefit from the growth in click and collect.
 “2017 – A brave new world?”, JLL, November 2015