Deloitte's latest CFO survey points to mounting corporate uncertainty, as firms assess the impact of global financial market volatility and weak emerging market growth. How does all this impact UK real estate?
The results of our latest CFO Survey are clear: large corporates are jittery...again. CFO's perceptions of external financial and economic uncertainty have seen the sharpest rise since we first asked this question five years ago. Emerging markets now rank joint second, together with concerns about Euro area growth, on CFO's list of worries. So, unsurprisingly, firms are telling us they are adopting a more defensive stance. In particular, the outlook for hiring over the next 12 months has deteriorated noticeably, along with that for capital expenditure, as the emphasis on cost cutting increases.
The potential implications for occupier demand in the UK real estate market are for a weakening of the recent wave of leasing activity, but is this really likely to be the case?
Despite concern over global growth prospects, CFOs still take a favourable view of the UK's economic outlook. Worries over poor productivity and competitiveness are subsiding, and the introduction of new products or services, and expanding into new markets remain UK firms' number one priority. This ongoing positive sentiment has been reflected in rising office take up and further growth in rents this year, and not just in London. And while business uncertainty is rising, consumers are more confident than at almost any point since 2007, with their optimism finally being matched by sustained growth in the retail sector. Increased corporate uncertainty might be enough to slow occupier demand over the next half year, but underlying confidence in the domestic economy should stop it grinding to a halt.
Yet while CFOs remain reasonably optimistic about the UK's prospects, they are less sanguine in their perceptions of global risks: they see uncertainty arising from the implications of tighter US monetary policy, weakness or deflation in the Eurozone, and weakness or volatility in emerging markets.
Capital markets are also feeling the effects of this global uncertainty. Just because concerns relate to events taking place outside the UK does not mean these are not important drivers of the UK real estate market. True, the impact of rising interest rates on values has been well debated, and the glacial pace of change is cushioning the severity of any adverse effects. But the shock of emerging market volatility has had a seemingly far more direct impact: recent weeks have seen a number of high-profile sales of UK properties fall through as their far eastern purchasers have pulled out. Coincidence or not, with overseas investors currently accounting for half of UK investment activity, this cannot be ignored.
However, clearly none of these things are happening in isolation. In addition to weakening prospects for global economies, the CFO Survey also highlights two important financial market indicators - a shift in investor demand away from equities towards the relative safety of government bonds, and rising financial market volatility as measured by the VIX index. We have seen a confluence of these conditions at numerous points since the financial crisis, and it will be interesting to see whether now, as then, the UK's comparatively buoyant economy, and reputation as a safe-haven market for real estate investment will continue to attract further inflows of global capital.
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