We are now optimistic that a gradual, but sustained economic recovery is underway. The Q1 GDP number was 0.3%, which surprised most commentators on the upside. The majority of this growth came from the services sector, but output from the manufacturing and construction sector looked to have been improving month-on-month through the quarter too.

Growth expected throughout 2013

More encouraging survey data has recently emerged that reinforces our view that the economy is now well placed to extend this growth through Q2 and into the rest of the year. The Q2 2013 ICAEW / Grant Thornton Business Confidence Monitor was at its highest level since Q2 2010; the April PMI surveys all showed rising activity balances; and the CBI Industrial Trends survey reported the strongest expectations for a year.

Expectations of a more sustained recovery are based on a number of factors: improving business confidence will prompt companies to start spending their extensive cash reserves; a weaker pound is making the UK more competitive; a recovery in the global economy, especially the US, is good news for UK exports; and real incomes continue to grow.

Don't get too excited...

However, this optimism should be tempered with a dose of realism. Even though the UK is expected to return to sustained, yet modest growth this year, our performance pales in comparison with the emerging BRIC economies and also the US. The good news though, is that we are expected outperform our main European competitors over the next three years, including France and Germany.

Property market: South East still dominates, but regions are improving

IPD’s latest quarterly release of UK property data shows many of the trends that have been apparent in the UK property market have continued in to 2013. West End offices, South East (i.e. London) retail and City offices are the outperformers, returning between 1.5% and 2.5% over the quarter, whereas, down at the bottom of the list, Rest of the UK retail and offices are still the worst performers.

However, the gap between the top and the bottom of the market has narrowed this quarter, from 420 basis points, to 250 basis points: West End offices returns have dropped by 60 basis points and Rest of UK offices improved by 110 basis points. While drawing firm conclusions from quarterly data is tricky, this could indicate that we are reaching the peak in the gap in the performance of these markets.

Returning investor interest in regions

As shown by the demand for regional property and regional portfolios in our Q1 UKIT report, the current yield gap between London and the regions is prompting investors to look at these markets with greater interest than they were six or nine months ago. But, as the economy improves rents will stabilise, and as investors continue to move into this space, so too will yields. This will start to reduce the pressures that have caused the divergence away from the historical relationship in the performance of property in London versus that in the regions.