Autumn 2017: still the season for UK real estate
If, to paraphrase an old adage, you were lucky enough to go away in May and come back on St. Leger’s day, you might be curious to know what you missed over the summer. The answer is quite a lot.
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No summer slowdown
The summer months enjoyed a steady flow of improving market data, boosting sentiment, and resulting in stronger set of forecasts in the IPF’s latest consensus report. September’s edition saw All property total return expectations for 2017 jump to 6.7%, up from 4.8% predicted in May – and a far cry from the 0.6% forecast this time last year. Nevertheless, our view is that the consensus is still somewhat pessimistic: we think there is a good chance returns will hit double digits this year.
Source: IPF Consensus Forecasts
Driving this improvement in outlook has been a relatively strong run of data from IPD, which shows year to date capital growth of almost 3%. Importantly, rather than being a function of one or two specific parts of the market, this improvement has been seen across almost all of the major property sectors in recent months. IPD’s August release shows that the source of capital value growth has been split fairly evenly between rental growth and yield declines.
Capital value growth has undoubtedly been supported by a continued recovery in transactional activity. RCA reported a 5.4% increase in volumes for Q2 over Q1, while the most recent indications for Q3 suggest that this momentum has very much been maintained. UK investors ultimately remain net sellers of assets to overseas purchasers, but appetite from UK institutions is on the rise.
Source: Real Capital Analytics
Autumn themes
Yet the numbers only tell one part of the story, and as the nights draw in, there are certainly enough broader themes emerging for many a fireside chat. For a start, the latest figures show unemployment has dropped to 4.3%, the lowest rate since 1975, while CPI inflation reached 2.9%. This means attention is once again turning to the question of monetary tightening. Few doubt the Bank of England’s need to raise base rates at some point, but according to financial markets at least, that point is now closer than it seemed before the summer, and gilt rates have already risen in anticipation: UK 10 year gilts are 1.32% having jumped from less than 1% just a few days ago.
Much ink has been spilled in trying to establish the impact of rising gilt rates on property performance, with relatively little by way of conclusion. What does seem clear is that the effect is less to do with higher rates themselves than the strength of the economic environment in which the rise takes place.
Meanwhile, income is rising up the agenda as domestic investors in particular consider how to maximise return during a period of lower capital growth. But which sector is the best source of income? Industrial property used to be the obvious answer, but that is less clear today: its soaring popularity has depressed yields, meaning that income is now higher amongst some of the retail subsectors. Is retail the new industrial? The right asset can certainly provide a good income return, and we are reminded that re-letting risk is lower than the other major sectors, despite what the media coverage of struggling high streets might imply.
Source: MSCI
And then then there is the question of overseas investment, which has accounted for 60% of purchases by volume this year. With our data stretching back almost 30 years, we can see that inward investment comes in waves: as inflows from one country or region slow, demand from others is in the ascendency. We are therefore sanguine about any flux in the source of capital, and are more interested in the extent of competition from other global real estate markets. Key continental European locations have benefitted from strong investor demand over the past year, but this has caused yields to fall to levels that arguably leave the UK looking comparatively good value.
As ever, new data throws up new questions, but to borrow another saying, in times of uncertainty it is ‘an investment in knowledge that pays the best interest’.
Our Capital Markets team has a reputation for acting on the most high profile property transactions around the UK. With over 75 UK brokers across 11 regional offices we are uniquely positioned to identify high quality commercial investment opportunities tailored to your needs.