Private sector development activity in January grows at its fastest rate for eight months. Data from the Savills Commercial Development PMI survey indicated that levels of development activity in the UK commercial property sector experienced a robust increase in January. The pace of growth re-accelerated, after easing through December, driven by the sharpest rise in private sector activity for eight months. Moreover, commercial property developers signalled an increasingly bright outlook for activity in the months ahead.

FDP Savills views on the report's findings are that "the biggest issues currently facing investors in commercial property are related to the unlinking of the investment market from the leasing markets. While rental growth has, at best, been uninteresting over the last three years, strong investor demand for commercial property has led to yields hardening by over 100 basis points in the last 12 months. Looking ahead the question is whether investor demand will soften to reflect risk in the leasing markets, or will the leasing markets recover and prop up the current investor bull-run. Our view is that for a variety of reasons, including improving liquidity, the downward pressure on yields will reduce in 2005. This will be counterbalanced by improving rental growth, leading to maintenance of All Property total returns at around their long-run average of 10%."

Of the nine individual lines of commercial development monitored, private sector new build activity continued to display the strongest growth performance in January. Commenting on the survey, Mat Oakley, head of Savills’ Commercial Research department said: "After the pre-Christmas lull in activity it is no surprise that development activity has returned to the steady growth levels that were maintained throughout 2004. What is most exciting for 2005 is the sharp improvement in developer’s expectations for the next three months."

KEY FINDINGS FOR JANUARY 2005

An increase in total commercial activity was recorded for the twentieth straight month in January. Furthermore, activity expanded sharply, and at a far faster pace than in the previous month. Growth in private sector activity was recorded ata strong rate that was the fastest since May of last year. Public sector activity, however, again showed only a slight improvement.

The degree of optimism held about prospects for activity in the three months ahead strengthened. Commercial property developers attributed their positive outlook in January to anticipated market growth and, more specifically, to recently secured projects waiting to come on line. The highest confidence of all was shown to be for retail & leisure activity.

Levels of commercial development activity rose sharply in each of the three geographical regions monitored. In line with the trend observed throughout 2004, activity grew at the sharpest pace across the Rest of the UK. However, strong rates of growth were also recorded for the Rest of the South East (following a slight decline in December) and London.

Growth of activity was recorded for eight of the nine areas of commercial development covered by the survey. Private sector new build activity again showed the strongest expansion, and rose at the sharpest rate for six months. Of the other six areas of activity to show improvement in both December and January, four did so at a quicker pace compared to the previous month.

Following no change in December, office fit-out activity expanded strongly in the opening month of 2005. Meanwhile, after also stagnating one month earlier, public sector office activity showed a marginal improvement.

Public sector retail & leisure activity declined for the second month in a row. However, January data signalled only a small reduction of a similar scale to that recorded in December.

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