As 2019 comes to a close Jonathan Bayfield looks ahead to the key themes that will shape the UK real estate market in 2020 and beyond.
1 minute read
Broadly, activity in the UK is being influenced by the similar macro-themes to Continental Europe, particularly the lower for longer rates environment and the focus on environmental, social and governance, although the uncertain political environment and impact of Brexit also need to be carefully considered. Nevertheless, real estate continues to offer attractive illiquidity premia for investors seeking sustainable income for cash flow and liability-matching.
We expect property owners to have to work harder to sustain income as lease lengths fall and occupiers demand greater flexibility
However, in the future we expect property owners to have to work harder to sustain income as lease lengths fall and occupiers demand greater flexibility. For example, in the office environment, the shift towards flexible working space is likely to mean that underlying rental income streams reflect changes in market rents more quickly. This implies rental income streams will be more volatile than in the past, closer to that of market rents.
In this environment, investor appetite will increasingly be skewed towards locations with more robust long-term demand characteristics. Central London, Manchester, Cambridge and Birmingham, characterised by international connections, deep pools of talent and innovative cultures, look comparatively well placed.
Logistics and office markets look more attractive than the retail sector, similar to Continental Europe
As with Continental Europe, pricing is elevated by historical standards for many prime markets; however, the UK property market is still attractive on a risk-adjusted basis, particularly compared to fixed income assets (given the lower yield environment).
Overall, and much like Continental Europe, logistics and office markets look more attractive than the retail sector, similar to Continental Europe. Broadly, London and south-east logistics and Cambridge and Manchester office markets look to have the most growth opportunities. The repricing of retail assets is further advanced in the UK, but there is still value to be found given the scale of the structural challenges the sector faces. All retail sectors, bar the supermarkets have a challenging outlook.
Looking ahead, as the property and economic cycle slows, there may be opportunities in long-income style real estate. Historically inflation has been higher than open market rents, and current relative pricing remains in line with historical norms. In addition, depreciation and maintenance costs continue to impact returns as yields remain low in many traditional sectors.