UK real estate defies predictions of post-Brexit blues, says LaSalle
The UK real estate market continues to exceed the expectations set in the aftermath of the country’s Brexit vote, driven by an abundance of liquidity, opportunities in urban logistics and factors such as the demand for serviced office space in London.
Meanwhile across the rest of Europe, real estate fundamentals continue to be supported by capital inflows and improved demand, with office and logistics markets posting strong rental growth.
The robust health of the real estate markets across Europe are the key findings of LaSalle Investment Management’s Mid-Year 2018 Investment Strategy Annual (ISA).
In the UK, the ISA finds that the risk of a Brexit ‘shock’ has receded, while the positive background for real estate is also being supported by an independent monetary policy, an improved fiscal position, the continued strong, flexible labour market and an inexpensive currency. Continued low bond yields make income-producing real estate look attractive, while London will continue to appeal to investors thanks to high liquidity and transparency, and deep human capital pools.
In terms of individual UK sectors, the ISA finds that offices are seeing strong demand, driven in part by serviced office operators, and, looking ahead, positive rental growth in London is expected from 2020 onwards. Industrial rental levels, meanwhile, have already increased significantly in recent years, but above-inflation rental growth is still expected to continue. There are particular opportunities in converting edge of city and edge of town retail into high performing logistics.
Meanwhile a spate of closures in the retail space means rental growth is expected to be negative, or only marginally positive, over the next few years, while residential remains a long-term relative winner in spite of a slowing housing market and easing demand from foreign workers.
LaSalle’s twice-yearly ISA looks at investment trends around the world and highlights the best investment opportunities going forward.
Mahdi Mokrane, LaSalle Investment Management’s European Head of Research & Strategy, says: “The UK real estate market has exceeded expectations in 2017 and the first half of 2018, despite economic fragility and ongoing geopolitical uncertainty.”
“Looking ahead we believe there will continue to be an abundance of liquidity targeting both ultra-secure (annuity-like level) real estate as well as enhanced-return real estate. The former stems from domestic pension funds seeking an alternative to index-linked bonds, and the latter from global real estate funds sitting on a significant quantum of dry powder and looking for attractive opportunities.”
Turning to Continental Europe, the ISA finds that, in the short term, investment appetite for real estate is expected to remain robust, given strong capital inflows, improved demand fundamentals and the spread property yields continue to offer over risk-free rates. Looking further ahead, even if government bond yields rise, they will remain very low in a historic context, suggesting that property yields will expand in turn – but remain relatively low as well.
That means offices are now seen as more attractive across the entire risk spectrum and rack-rented urban logistics are now viewed as a more defensive asset class, while Spain is looking increasingly attractive as an investment destination.
In terms of individual sectors across Continental Europe, the ISA finds that offices are expected to see strong growth over the next 18 to 24 months, followed by a slowdown, although growth will remain positive. Contrary to the UK, prime shopping centres and high street rents are also expected to record solid growth over the next years despite ongoing structural changes.
Even though the logistics sector has been growing over the past two decades, changing retail patterns and consumption growth facilitated by e- and m-commerce, and near shoring are expected to continue to be the primary drivers of strong demand. Rental growth prospects are strongest for France, Italy and Spain, and are expected to exceed historic norms.
Jacques Gordon, Global Head of Research and Strategy at LaSalle, says: “Thus far, 2018 has shown adaptability to the structural, secular and cyclical changes that have rolled through the commercial real estate market. Our mid-year update indicates that core real estate continues to perform at an appropriate level, relative to other asset classes, and that the inclusion of real estate raises portfolio returns, for a given level of risk. With looming trade wars, geo-political tensions, and differential exposure to rising rates, this pattern of highly-correlated global growth could be coming to an end. Our mid-year update indicates that the last six months have raised the probability of country-specific differentiation, as both positive and negative trends unfold in the final six months of the year.”