December 7, 2016
The unexpected political events of 2016 will lead to a rise in caution and risk aversion among real estate investors in 2017, making secure income streams more highly prized among core investors globally. This is expected to benefit the UK market, where high levels of transparency and stable legal structures make real estate a safety play, according to a report from real estate advisor Savills. The firm unveiled its predictions for UK real estate at its annual cross-sector briefing this week, taking a detailed look at the commercial property, residential and agricultural markets. The overall story for UK real estate is one of slower growth. In the commercial market, average total returns on UK property investments are likely to be approximately 5.6 percent per annum during 2017-2021, with a 1.6 percent five year capital growth forecast for office values and a 4.4 percent growth forecast for office income returns. The report claims that there will be a fall of around 30 to 40 percent overall, and possibly up to 50 percent in Central London.
Commercial property assets with long lease structures and strong rental covenants will continue to attract attention, while institutional investor appetite for large residential portfolios is expected to continue to grow. The relatively high yields and strong income flows from commercial property will continue to attract strong demand, says Savills. Greater risk will mean a strong focus on sectors where the fundamentals of supply and demand are most insulated such as retirement housing, logistics and energy.
Mark Ridley, Chief Executive Officer, Savills UK and Europe, says: “‘Expect the unexpected’ is now the normality, not the exception, on the world stage. Despite this, property remains a fundamentally safe asset class, giving strong income returns and, in many cases, is a refuge for capital preservation in the longer term, its appeal remaining resolute. Nationally, the markets continue to appear robust in all sectors, although there remains some hesitation on what Brexit will mean in the financial markets, around biomed and also in an agricultural market place without EU subsidies. The sterling devaluation has made UK property very attractive for international investors pegged to the US Dollar or Euro, with 2017 activity in Central London likely to be dominated by Asian investors, with American and Pan-European investors also strong nationally.”
Savills’ commercial predictions for 2017 and beyond:
- Uncertainty, rising demands from pension funds, and low bond yields will continue to drive a global hunt for investments that deliver secure income. This will lead to strong demand for properties in the UK that have such characteristics, whether they are long-let City offices, index-linked warehouses, or ‘alternative’ asset classes. Demand for such assets is likely to exceed supply, and Savills expects to see improving capital value growth
- Lender and borrower risk aversion will lead to a 30-40% fall in development activity across all sectors and regions, particularly in London, challenging tenants with forthcoming lease events but presenting an opportunity for developers prepared to press ahead with projects
- Tenants may demand greater flexibility when signing leases but occupational demand will be maintained. Declines in development activity, which are likely to be most intense in 2019-21, will lead to falling Grade A vacancies and rising rents towards the turn of the decade
- Non-domestic investor interest in the UK will continue to rise, with the next five years likely to see record levels of international investment in assets outside London
- Specific opportunities are available in logistics warehouses in strong locations such as the Midlands and the M25 area. With availability at record lows and demand unaffected by the uncertainty, this sector looks likely to continue to out-perform the rest of the market due to its long and often indexed leases, as well as the landlord-friendly dynamics in the occupational market
- High quality regional office assets should also perform well. Generally less affected by post-referendum uncertainty, availability in many markets is low, particularly of new and refurbished space, while demand is likely to remain high, supported by some large organisations continuing to relocate some functions from London