2020 outlook for the UK real estate sector
Daniel Austin (pictured) is co-founder at ASK Partners
Buoyed by a mood of greater confidence since last year’s general election and the UK’s actual exit from the EU, as well as strong fundamentals, the UK’s property market has had a strong start to the year.
Earlier this month the Halifax reported that UK house prices were rising at their fastest rate for over two years. Commercial real estate (CRE) is also showing signs of recovery, though there is still a wide variance in the performance of the various asset classes within the CRE sector.
So although the overall outlook for UK real estate looks bright, investors still need to carefully assess opportunities and below we review the prospects and potential for the major real estate asset classes.
Office markets maintain strong appeal
Office markets outperformed last year, with key drivers including the supply/demand imbalance and corporates using offices as part of their recruitment and retention strategy in a very tight labour market, as CBRE pointed out in a recent report. Conditions are favourable for this performance to continue.
There is a clearer economic outlook, the war for talent is still intense and demand is increasing for new high-quality office space. There could be some unexpected benefits from Brexit too – last month it was announced that more than 1,000 banks and asset managers from the EU are planning to open offices in post-Brexit Britain so they can continue to serve UK clients.
As CBRE and other analysts have noted, since Brexit there has been a widening of the differential in pricing between UK yields and the rest of Europe. This means that UK office property will offer relative value to overseas investors in 2020 and if EU withdrawal issues are settled quickly, yield compression could emerge as the year progresses.
Industrial and logistics performance driven by online retailers
Online retailers have probably been the biggest factor in driving demand in the sector. And though the latest data shows the pace of UK online retail growth has slowed, this has had no significant impact on the market as online retailers continue to take space and legacy retailers continue to adapt their supply chains to compete more effectively.
During 2020 we expect the adoption of more speculative logistics in the form of micro depots and shared urban hubs, providing more options to occupiers and addressing the undersupply of logistics land close to urban locations.
Rents will likely continue to outperform other sectors and investment volumes are expected to rebound given the greater market confidence. Yields are low but robust and are unlikely to fall further.
Selective retail sub-sectors still attractive
UK retail is immersed in a period of structural and cyclical change and the environment remains challenging. Overall rental values and capital values will likely remain under pressure. Focusing on particular retail sectors, the convenience sector, in particular, the food and grocery arenas should continue to perform.
However, they are unlikely to match the health and beauty sector boom, driven by a growing consumer interest in fitness and wellbeing. The key trend will be how retailers adapt to the changes in the sector and in consumer demands, as focus shifts towards smart technology, online shopping, environmental impact and sustainability.
Assisted living has strong fundamentals
According to a Savills report, in developed nations global life expectancy is 82 years of age and it is forecast to reach 85 by 2040. Emerging markets are slowly catching up and are expected to reach a life expectancy of 80 over the same period.
The trend is no different in the UK. This growing demographic group is embracing new ways of living and looking for more flexible, high-quality accommodation with easy access to amenities and a greater sense of community.
The less cyclical nature of senior living as an asset type makes it particularly appealing to investors, and recent research by Savills found that, on average, the yield discount that senior housing offers over other asset classes ranges between 100 bps over prime multifamily and 66 bps over prime CBD-offices. Furthermore, the lack of debt liquidity for senior living assets means higher margins for lenders that are active in the sector.
Student accommodation has graduated to a mainstream asset
Today, UK student accommodation is a £50bn sector, according to Knight Frank’s latest Global Student Property report, making it the second largest globally. The pace of growth is continuing as the sector expanded by a record 5% last year.
Overall this trend is expected to increase, due to a significant population bulge in the current 16-20 age bracket, as well as a growing overseas student market, which currently makes up nearly a quarter of the student population.
CBRE’s latest student accommodation index shows a strong increase in capital values, which are increasing by around 6.5% YoY, with Central London outperforming the regions by a healthy margin, recording annual total returns of 17.5%.
Outside Central London, annual total returns were 10.5%. Given this backdrop, it is clear the sector has all the attributes to perform well and perhaps be near the top of the class in 2020.