The UK will remain a key investment market for domestic and global investors in 2017 but it is important to be very selective with opportunities, LaSalle Investment Management has said in its Investment Strategy Annual (ISA) 2017 edition.
Confidence in the UK occupier market held up much better than most expected immediately after the Brexit referendum, and prime assets have traded at little or no discount to their pre-referendum valuations, according to LaSalle's research. But the report added that 'investors should be prepared to encounter stretches of elevated capital market volatility in 2017-2018'.
'We believe that the UK will remain one of the world's most transparent, liquid and supportive destinations for investors in spite of the current uncertainty around the country's future relationship with the EU. Looking ahead, given the prospect of a hard Brexit, fewer of the larger, longer-term occupier decisions are likely to be made until much of the volatility has dissipated,' commented Mahdi Mokrane, head of Research and Strategy for Europe at LaSalle.
LaSalle said it remained a core income-focused buyer in the market and would be for the year ahead, but not at any price, and only under certain conditions. 'The business also remains committed to taking leasing risk on assets in favourable locations in the UK, depending on market opportunities and taking into account the potential Brexit impact on tenants', the company commented in a note to the press.
Elsewhere in Europe, the ISA anticipates that occupiers and investors will continue with their pre-Brexit business plans based on modest growth in Germany and France, and stronger economic performance in Spain, Poland, Sweden, and to a lesser extent, the Netherlands. Furthermore, the report finds that competition for core income-producing real estate is expected to remain intense.
PRS a 'clear winner', European volatility ahead
In terms of investment type, LaSalle said in the UK it would focus on long-leased retail offering accessible, flexible and affordable solutions to 'ever-demanding retailers', and also anticipated that the private rented residential sector (PRS) would emerge as 'one of the clear winners in the years ahead given the chronic undersupply of housing in many parts of the UK'.
It added that the London office market may offer short term investors Brexit-led re-priced investment opportunities whilst continuing to generate longer term investment options in attractive emerging locations, and also tipped mezzanine lending as an income-rich strategy.
The UK's continuing attractiveness was set against a less clear outlook for Continental Europe, where LaSalle said 'future elections could become socially disruptive and cause significant capital market volatility'. Against that backdrop, it recommended core office investments in cities such as Paris, Amsterdam, Frankfurt and Munich, likely to outperform average EU-wide returns, as well as dominant shopping destinations (particularly in France) or high street retail pitches (in Sweden and Germany) in thriving commuter towns.
Urban logistics and residential developments in the Netherlands and Germany were added to the list of develop-to-hold strategies.
'Investing solely in domestic markets greatly reduces the number of potentially rewarding opportunities to take advantage of in the next two years. The winds of change will be blowing through the world economy in 2017. Headwinds and tailwinds can both be expected, along with market turbulence,' concluded Jacques Gordon, global head of research and strategy at LaSalle.
