Uncertainty around the outcome of Brexit looks set to bring a host of opportunities and challenges for real estate investors looking at the UK in 2017.
JLL’s recent UK Property Predictions report analyses the real estate market, sector by sector, to see where the winners and losers may lie in the year ahead. Here are six key areas to watch in the year ahead.
Despite experiencing significant falls following the EU referendum in June 2016, capital values have quickly stabilised. In some sectors, such as logistics, values have even risen slightly thanks to the ongoing shift from high street to online shopping.
This positive performance means average total property returns are predicted to be 4 percent this year, with capital values broadly stable, according to estimates by JLL.
The majority of this growth is expected to occur in the prime market where yields are likely to stabilise. The secondary market, by contrast, could be hit by the slowing economy driving investors towards core assets. In the longer-term, this could create opportunities for value creation.
UK property funds, which saw a huge wave of redemptions after the Brexit vote, could become more popular again, especially if occupier markets prove resilient. Unlike the rest of the world, the UK hasn’t suffered yield compression and pricing remains relatively attractive.
Alternatives coming into their own
Investor uncertainty could increase the popularity of alternative sectors, whose income streams tend to be less affected by concerns over the short-term economic outlook. As the alternative sectors mature, investors could even start moving up the risk curve.
Ollie Saunders, Lead Director of Alternatives at JLL, states: “We predict that 2017 will see alternatives outperform the rest of the market – with healthy income returns and an anticipation of yield compression. Alternatives made up more than 25 percent of all commercial transactions in 2016 – up from 10 percent in 2010. They are a meaningful and maturing part of the UK property market.”
Industrial – the standout sector
The commercial sector predicted to deliver the highest total investment return this year – and indeed up to 2019 – is industrial. High occupier demand coupled with limited supply means income returns and rental growth will be strong.
London has been losing industrial land at a faster rate than expected because of the capital’s growing housing need. 2017 could see proposals for a multi-storey warehouse development, making it the first such proposal for 10 years.
But there are concerns that Brexit could exacerbate labour supply problems in industries relying on EU workers. There is currently a shortage of around 35,000 large goods vehicle drivers according to the Freight Transport Association. Labour is likely to be a hugely important issue for the industrial property sector in 2017.
Well-connected offices will win
Occupiers were cautious in the immediate aftermath of the Brexit vote, take up in Q4 reached an unexpected high, which prevented vacancy rates from rising markedly. While rents in the office sector are expected to come under pressure in London because of an increase in completions and, in turn, choice for tenants. Areas with a low vacancy rate and good transport links – such as Southbank, Covent Garden and King’s Cross – will fare better, while those reliant on the financial sector could underperform.
Neil Prime, lead director, UK Office Agency, said: “Given the current level of demand and space under offer, this momentum looks set to continue into 2017. Nevertheless, the activation of Article 50 in March is likely to reinforce the cautious approach taken by many occupiers – although for many this may come in the form of additional flexibility rather than withdrawal from the market.
Retail will weather headwinds
The retail sector will suffer rising inflation, labour costs, import costs and business rates this year, but despite these headwinds retailers with a well-located store portfolio and customer-centric digital strategy are expected to prosper.
Falling rents and the weak pound could create opportunities, with trading volumes growing in the more secure secondary shopping centre, retail warehouse and high street markets.
2017: the year technology takes hold
Ongoing technological innovation looks set to become more evident in real estate this year. There will be a greater focus on smart buildings and new types of space such as incubators and accelerators. There could also be a drive towards workplaces with adaptive design and personalisation, helping companies future proof their real estate.
Technology could be used more widely in residential construction, for example through the adoption of Business Information Modelling, which can help produce cost certainty during a build.
Head of UK Capital Markets, JLL