A snapshot: UK commercial property predictions for 2018
Following the release of Autumn 2017's UK Capital Markets House View report, key points are highlighted below:
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• 2017 has been a much stronger year than many anticipated: The economy has surprised on the upside, with unemployment falling to the lowest level since 1975, consumer spending robust, and occupier take-up healthy.
• As we look towards 2018, we see a number of headwinds on the horizon – but scope for optimism too. We do not dismiss the potential impact factors such as political uncertainty, Brexit, rising base rates, or consumer debt, may have on occupational activity, investment demand and property returns. But we also see positive momentum driven by growth in lending, new capital sources, greater clarity over Chinese capital flows, and the global economic recovery.
• Performance could hit double digits this year, but we look to a more normal rate of around 7% in 2018. This will be driven primarily by income returns, and on this basis, we believe that retail will become the new industrial: industrial property used to be the obvious sector for investors seeking income, but plunging industrial yields mean income returns are now higher amongst retail property, especially retail warehouses and supermarkets.
• What about offices? Activity is buoyant, and not just in London, with overseas investment continuing to act as a strong support to pricing. Although we do see the origin of overseas capital evolving, we believe the broader rationale for investment in UK property remains intact, and that much of this will continue to be deployed within the office sector.
• Industrial property: Healthy income and a clear occupational story proves compelling for domestic and overseas investors alike. Currently, just 6% of UK industrial stock is currently in foreign ownership - less than any of the other major property types - but this is changing. Overseas investment accounted for almost 50% of activity in the 12 months to September 2017, focused on distribution warehouses. We expect that some overseas investors will seek operational platforms as a way to enter the market, rather than trying to build scale through relatively small lot-sizes.
• The focus on prime (and good secondary) stock is hardening: sell selectively. We expect that the widening yield gap between prime and secondary property will incentivise those considering sales of non-prime assets to sell into what remains a liquid market.
Please contact us for a full copy of our UK Capital Markets House View.