With the UK’s yield on many commercial property sectors generating higher returns than those of much of Europe, what can we expect with the ongoing process of Brexit?
There is a shadow being cast over the economic growth for 2018 due to this uncertainty over UK’s future relationship with the EU. The natural reaction for investors, caution with each step, but never fear, this does not mean that investment will stop.
Historically, property has been a safe haven for capital preservation, and we don’t see this stopping any time soon; hence prime and secure investments will be all the rage! Are you an opportunist? Well, there will be a herd of investors charging towards a comparatively scarce pool of assets. Some investors will be trying to generate high returns through development, for example turning short, risky income into long, secure income.
Blue Alpine looked into Savills ‘Commercial Outlook’, and found the following six trends predicted for 2018.
- Non-domestic demand to remain strong
With the pound staying weak and UK commercial property yields now looking high in comparison to prime European and Asian markets, the non-domestic investor demand for UK commercial is set to remain strong in 2018. - Value beyond prime – now is the best time to add value
With risk-averse domestic and global investors dominating the market in 2018, there will be less competition and falling prices in secondary and tertiary markets. This means now is the premium opportunity to value-add and for opportunistic investors looking to change short-term income into long-term. - Alternative appeal – 2018 to be the year that alternatives become mainstream
The unifying theme among the plethora of alternative asset classes is their long-term secure income streams and popularity among risk-averse investors. So, 2018 will be the year that alternative becomes mainstream. - Retail therapy – real earnings growth will improve for the retail market
In 2017, a perfect storm of negativity hit retail. For 2018, we will see better news about real earnings growth, and a less homogenous attitude to retail with investors. Some segments will be a good buy due to their defensive characteristics, while others just look cheap. - Brexit balance – in 2018 risks will be much clearer
With London’s office market shrugging off the worst of the pre-Brexit negativity, 2018 will see more balance in the assessment of how much, where and when occupational risks will rise. - New-tech tools will emerge
While wellness and staff satisfaction will continue to increase in importance for many employers when choosing buildings and locations, some businesses will start to look at offsetting the costs of delivering wellness by using the margin-enhancing tools of artificial intelligence (AI).
So, with the ZEBRA (BREXIT) in the room that everyone can’t help but stare at. Yes, that’s right, we don’t refer to BREXIT as the elephant in the room, we refer to it as the ZEBRA. According to JLL , they expect 2018 volumes to total around £55 billion, which is only slightly down on the circa £60 billion for last year.
Even with the UK government’s announcement at its budget on 22nd November 2017 stating it would remove the capital gains tax exemption for overseas investors in the UK commercial property from April 2019, the predicted volumes for 2018 of £55 billion is quite good. This change only aligns the UK with most other countries in the EU as well as most developed countries.
Foreign investors will continue to seek UK commercial property because of liquidity, lot sizes, landlord-favourable leases and the strong economic and leasing fundamentals.
According to Tom Goodwin, UK Strategy & Research Analyst for AVIVA, overseas buyers have accounted for more than half of total investment in British commercial property for 2017, and in London that figure is higher than 80 percent. He expects continued overseas interest in 2018, but investors should keep an eye on these capital flows as any reversal would have an adverse effect on pricing.
In AVIVA’s perspective, they continue to anticipate a relatively favourable trading relationship between the UK and the EU, with a transition period after the UK’s exit from the bloc in 2019, although the risk that Britain could leave without a trade deal should not be discounted. In the event that the future trading relationship includes barriers to trade, the UK economy – and real estate occupier market – is likely to struggle.
Building on the predictions for 2018, we should consider higher interest rates. AVIVA has some interesting data and charts.
According to AVIVA, their base case is that pricing will weaken gradually as rental growth slows and bond yields slowly edge out, favouring long-income strategies. However, there is a risk a sharper rise in bond yields might be ‘imported’ from the US should the Federal Reserve’s ongoing rate hikes lead to higher yields across global bond markets. In that event, low-yielding property sectors would be hit particularly badly.
