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The UK market will rebound in the first half of 2020.
Investors will become more confident following the Conservative election victory and the passing of Boris Johnson’s Brexit deal. However, caution is likely to grow as trade talks begin in earnest and the new ‘cliff edge’ of a December 2020 deadline approaches. The UK nevertheless remains a highly attractive investment destination. Alongside transparency and liquidity, investors are reassured by the robustness of most occupational markets, the relatively high yield, and yield spread, and the country’s reputation as an innovation and talent hub, which implies strong longer-term prospects.
Consequently, the year will also see a return to higher levels of international investment, after a more domestically skewed 2019. Asia-Pacific buyers will be particularly prominent. Hong Kong and Singapore have already begun the charge, with a noticeable surge over the past few months. They will be joined by South Korean buyers, who were almost completely absent from the UK in 2019. They have been focused on continental Europe over the past year, but further yield compression will highlight the value in UK markets.
Meanwhile, risk-averse Japanese institutional investors have been examining UK markets with greater interest for several years – and any sign of more stable politics will lead to the first forays from this potentially enormous source of global capital. All in all, we expect UK investment volumes to total £55bn in 2020, with the activity – unusually – weighted towards the start of the year.
As ‘peak negativity’ on retail recedes, IPD total returns will bounce back to 5.8%.
Total returns for 2019 will be disappointing at -2.4%, although this will mostly have been driven by the annus horribilis for retail (-10.0% total returns). Industrial (5.1%) and offices (6.5%) will have had much more respectable years, with offices even seeing some capital growth. 2020 will be a different case entirely. Although there will still be real difficulties in the retail sector, the worst falls in value are behind us, and total returns are forecast at 2.3%. With industrial expected to see another strong year (9.0%) this will push total returns into positive territory again. While the 5.8% forecast for this year may seem moderate compared to a few years ago, it remains respectable
in a low-yielding, politically turbulent world. There are risks to the upside if the economic bounce following the election and Brexit is strong and long-lasting – but this has to be set against other headwinds, not least the limited room for capital growth given where yields now are.
Financing and diversification will be increasingly important in driving returns.
With total returns more modest than a few years ago, innovative financing solutions will continue to offer a point of difference to those investors applying sophisticated debt and hedging strategies across their portfolios. Debt funds are also increasingly popular among many institutional investors and fund managers as they look to diversify across the full risk spectrum and gain indirect exposure to assets or portfolios outside their own direct holdings. These funds will provide reliable income streams as the market continues to attract higher-leverage buyers such as US private equity and Asia-Pacific property companies. Discipline will of course remain essential from both a borrower and lender perspective, but overall debt levels appear manageable across the market and there do not seem to be concerns around overleveraging as seen in the previous cycle. Meanwhile, funds will continue to diversify their exposure to real estate through a variety of means – from debt funds, emerging sectors and operational property to infrastructure and income strips.
UK Property Predictions 2020
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