The UK property market proved resilient last year, exceeding most expectations against the threat of political turmoil and drops in domestic spending.
But a weak pound attracted overseas investment and sectors such as industrials and alternatives such as student housing went from strength to strength.
So what does this mean for 2018? Can the logistics sector continue to deliver strong returns? Will prime central London residential recover and will investors start looking to regional hotspots? And what do flat house prices mean for the residential sector? The experts’ forecasts are out and here is EG’s roundup of top 10 property predictions for 2018.
Colliers matched its 2017 forecast with an expectation that investments in UK commercial property will exceed £50bn.
The figure is a drop from estimates of £55bn for 2017, reflecting continued pressure on prices and slow rental growth, but continuing to attract big international spenders looking to buy at scale.
Toby Horrell, Collier’s UK & Ireland chief executive, said: “Development activity in London, alongside the development potential in the regions, will bring new Grade A product across sectors that will help to drive capital activity in 2018.”
Colliers’ estimation sits below JLL’s £55bn and CBRE’s £60bn.
2. Total returns of 6.4%, with strong performance from industrial
JLL predicts a drop in returns from an estimated 10% in 2017, to 6.4% in this year.
Ben Burston, head of UK office and capital markets research, said capital gains tax may dissuade some investment but will simply align the UK with other developed countries.
In the firm’s 2018 UK Property Predictions report, Burston said: “The major reasons for investing in UK property remain – liquidity, lot sizes, landlord-favourable leases, the strong economic and leasing fundamentals, and at present, relatively high yields and a weak currency.”
JLL outlined that the industrials sector will continue to outperform, with a total return of 9.9%, followed by retail at 5.7% and 5.55%, and said that returns will be driven “almost entirely” by rents.
CBRE predicts industrial and logistics rental growth of more than 5% due to the consistent gap in supply and demand in urban areas.
Miles Gibson, head of UK research at CBRE, said: “While some property sectors will see extremely patchy growth performance, the rise and rise of industrials and logistics looks likely to continue, and the ‘beds sectors’ such as hotels, built-to-rent and healthcare are also set to grow strongly.”
Knight Frank has agreed with Savills and JLL’s house price growth of 1% for 2018, against Countrywide’s 2%. Knight Frank noted the decline in house prices since 2014, with modest annual improvements last year. In London, the firm predicts drops of 0.5%, but cumulative growth across the board for the next five years.
Andrew Burrell, head of economics and forecasting at JLL, noted that house price rises are more aligned with inflation.
He said: “This does not mean a complete standstill for UK housing. Demographics remain healthy in the UK, while housebuilding has rarely kept pace with demand.”
Burrell said this would be “more sustainable and less volatile” than recent years, calling it “an end to the golden age for house prices”.
CapitalRise said the dip in prime central London residential will recover as the market stabilises with a strong outlook for compound growth over the next five years.
Uma Rajah, chief executive at CapitalRise, said: “The data suggests prime central London property will continue to be the sector’s leading performer, with the current dip being arrested in 2018 and compound growth over the five years to the end of 2022 exceeding 20%.”
He explained that the downturn in PCL will spread to Greater London, taking the capital’s property down 2% overall, but PCL will hold steady in 2018, and can expect growth of 2% by 2019.
Slowing capital returns for expensive industrials and a correction of London property will make regional hotspots an attractive alternative for income returns, according to Kames Property Income Fund.
David Wise, co-manager at Kames, said: “In 2018, we expect property returns will be primarily driven by income rather than capital returns as London and the industrial sectors slow.”
As London property yields maintain current levels, Wise predicts a rise in offices and quality high street retail in top cities outside of the capital, but adds “careful stock selection will be paramount”.
He points to properties in good locations that “suit occupier requirements combined with committed tenants” for sustainable incomes.
Strong demand from multinational pharmaceuticals and large corporations will see office lease take-up rise in the South East.
Jon Gardiner, Savills’ head of national offices, said: “While take-up in 2017 has been muted, we are confident that larger corporate occupiers will resume making decisions in 2018 and commit to new space.”
He noted that global firms fighting to retain and attract employees will seek new spaces, replacing “tired, old and uninspiring accommodation” with “modern office buildings that provide plenty of amenity”.
Ericsson and Orange are on the hunt for new premises, and Gardiner expects this to motivate others. With limited supplies and development activity, the winners will be those few committed to delivering new stocks, with serviced and co-working providers offering viable alternatives.
Retail spending and industry sector employment growth means greater demand for limited space, amid bank lending constraints. AEW predicts new surges of rental growth, benefitting from e-commerce and logistics growth.
Ken Baccam, director of research at AEW, explained: “Occupier markets are showing better market rental growth as new supply remains modest and new absorption steps up with improving consumer spending and employment growth.
“E-commerce is a key driver for both the bifurcation in the retail markets and the new record take-up across logistics.”
Where major deals from overseas investors dominated the top transactions in 2017, KPMG predicts a “more varied” picture with high return alternatives attracting investment this year.
Andy Pyle, KPMG’s UK head of real estate, said: “With such interest in, and competition for prime real estate assets in the UK, investors are likely to continue to look at value-add opportunities in non-prime markets, where competition is less fierce.”
He predicted new investments in logistics, PRS and flexible or serviced offices, as well as the potential for fresh public M&A activity.
Knight Frank said the UK health market bed crisis requires private equity intervention and predicts that infrastructure funds and global investors will purchase UK health portfolios, along with hotels as seed platforms for REIT targets.
Julie Evans, head of healthcare hotels and leisure at Knight Frank, said: “The UK care market is facing an imminent crisis as the sector struggles to cope with a national shortage of beds.
“Our research estimates that circa 6,600 care homes are at risk of closure over the next five years, which equates to 140,000 beds.”
She explained this would cost £15bn, and estimated there is £3.5bn in UK private equity and £20bn in overseas private equity looking to enter the care home market to fill this demand.