Capital Markets: Predictions for UK Commercial Property Market in 2018
Key points and predictions to keep an eye on this year in relation to the commercial property market in the UK include the following:
- Last year (2017) saw stronger performance than had been expected by many analysts. Economic performance was surprisingly buoyant. Unemployment fell to levels last seen in 1975. Spending by consumers was also strong, and occupancy levels in commercial property were also encouragingly stable.
- In 2018, there are various challenges looming, however, the overall outlook is one of optimism. Critical influencing factors include the current political uncertainty, increasing base rates, rising consumer debt, and, of course, the uncertainty surrounding the Brexit final deal; all have the potential to adversely impact on demand for investment and property returns. However, on the positive side, lending is growing, and fresh sources of capital and the recovery of the global economy are all positive driving forces.
- Whiles some optimistic analysts might declare that 2018 will see double-digit performance, more conservative estimates predict around 7% as being realistic. The main driver of this will be income returns. According to experts Maritime Capital, this will lead to retail property replacing industrial property as the top pick for investors. Industrial property was previously considered the obvious choice for those investors looking for stable income, however, declining yields from industrial property have meant that returns obtained from retail property, especially supermarkets and retail storage spaces, are now outperforming those of the industrial sector.
- Office space continues to prove buoyant in many areas across the UK, not only in London. In many cases, this buoyancy is underpinned by foreign investment, maintaining prices at a healthy level. There is no sign that such foreign investment will increase dramatically this year, however, it is anticipated the UK office sector will remain attractive to such capital sources.
- The industrial property sector remains appealing to both foreign and UK investors. Currently, foreign ownership accounts for approximately 6% of UK industrial property, which is lower than for other property sectors. However, this is expected to change, as foreign investment represented around 50% of all acquisitions in this sector in the year to September 2017, with the majority of acquisitions being warehouses developed for distribution. It is anticipated that a number of foreign investors will continue to acquire such operational platforms because it is an excellent market entry approach, as opposed to scaling investment based on smaller lots.
- There is a strengthening emphasis on both prime property and also excellent secondary property. The development of a larger yield gap with regard to these two types of property may encourage some investors to sell assets which are no longer classified as prime into the currently buoyant secondary market.