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January 17, 2020

The UK economy is set for a noticeable bounce in 2020 with investors heartened by greater clarity over Brexit and a strong-majority Government.

After a tumultuous few years in UK politics, Boris Johnson’s election win brings a clearer path forward for business, including real estate. Over the next 12 months, UK real estate investment volumes will jump to £55 billion, compared to last year’s £47 billion, according to JLL.

Unusually, activity will be weighted towards the start of the year, says JLL. However, as thoughts turn to a future trade deal with the EU, sentiment could shift.

Jon Neale, head of UK research at JLL and Alistair Meadows, head of capital markets at JLL UK discuss the key challenges and opportunities for the UK economy in 2020 and what it means for commercial real estate investors.

What lies ahead for a post-Brexit UK?
Jon Neale (JN): “It’s now inevitable that the UK will leave the EU on 31 January 2020, following parliamentary approval. What’s less certain is what the future trade agreement will look like.”

Alistair Meadows (AM): “Amid the uptick in investor sentiment following the election, the UK economy will see a noticeable bounce as 2020 gets underway. With vast amounts of capital looking for a new home, and against the backdrop of a slowing world economy, the UK’s relatively high yields and yield spread could make it look very attractive indeed, especially to overseas investors looking for value. City of London office yields are currently around 4.25 percent, this compares favourably with Paris at 2.75 percent and Berlin at 2.65 percent.

JN: “However, if talks with the EU appear to stall, caution could return in the second half of the year.
“On the other hand, if a trade deal is agreed, stronger growth would be on the cards. Without a deal, 2020 growth is predicted to be 1.0 percent compared with an estimated 1.3 percent in 2019. But if a deal is struck, Oxford Economics, predicts a hike of 1.9 percent in 2021.

“There could also be an impact on sterling. The pound will probably continue to appreciate in the wake of a deal, and it could offer investors an opportunity to sell and take profit.

“Sectors to watch will include build-to rent, London offices and life sciences. I also think cities outside the capital could benefit from increased public spending and regeneration, in particular investment in transport.”

In what direction will Boris Johnson take the UK?
JN: “We saw many traditional Labour voters – including blue-collar workers – switch to Johnson’s Conservative party and we expect this shift to a broader electoral base to impact policies.

“As a result, this Government is likely to be more open to higher levels of public spending in areas like infrastructure, health and education and will also be keen to reflect public concerns about climate change. It may also be slightly less responsive to business.

“Some of this spending will help the UK real estate sector by boosting the economy. Major regional centres like Manchester and Birmingham will benefit from improved rail links, while spending on roads may open up new development sites in UK cities.”

AM: “The Government will remain keen to maintain a strong economy, but we don’t expect to see a wave of deregulation or tax cuts – at least in the short-term.”

How will global challenges impact the UK?
AM: “There’s no doubt that volatility is a watchword for global markets at present. Over the next 12 months the world economy represents the greatest headwind for the UK. The upcoming U.S. presidential election is unlikely to see much softening in U.S.-China trade tensions.

“However, as confidence returns, we’ll see higher levels of international investment into the UK, especially from South Asia, after a more domestic focus in 2019.”

JN: “The backdrop to Brexit is the world splitting into trade blocs as globalisation slows. I am not sure the Government or the public is really ready to grapple with the trade-offs that post-Brexit decisions will involve. But I am convinced that the long-term fundamentals of the UK – talent, universities, labour markets – remain strong.”

Click to find out the 5 big questions real estate will be asking in 2020.

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Alistair Meadows

Head of UK Capital Markets, JLL

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