In the land of the blind, the one-eyed man is king. In an increasingly unpredictable world, the UK, despite considerable post-Brexit uncertainty, is a bastion of stability compared to other countries and as such its commercial property sector will continue to attract investment.
According to Savills' 2017 Forecasts Briefing, held on Tuesday at the international real estate advisor's London headquarters, next year 'a rise in caution and risk aversion among investors is expected to benefit the UK market, where high levels of transparency and stable legal structures make real estate a safety play'.
Non-domestic investors' interest in the UK is therefore set to continue, and 'the next five years are likely to see record levels of international investments in assets outside London,' according to Savills. In general, sterling devaluation has made UK property very attractive to international investors in US dollars or euros, so '2017 activity in Central London is likely to be dominated by Asian investors, with American and pan-European investors also strong nationally,' said Mark Ridley, CEO of Savills UK and Europe.
'Uncertainty is not necessarily a bad thing, and in any case the UK seen in a European or global context is not insecure or unstable, plus it is cheap at the moment, so I predict record foreign investments,' said Mat Oakley, head of European commercial research at Savills.
Core investors will swing to long-term secure income
In these risk-averse times, anything income-producing will be sought after and prices will rise, Oakley said, as core investors will swing heavily to long-term secure income. On the other hand, opportunistic investors will be able to capitalise on price falls and benefit from reduced competition, as the field is now distinctly less crowded.
In the commercial market, average total returns on UK property investments are likely to be 5.6% per annum during 2017-2021, with a 0.4% five-year capital growth forecast for office values and a 4.4% growth forecast for office income returns. The relatively high yields and strong income flows from commercial property will continue to attract strong demand, according to Savills, but with a renewed focus on ‘insulated’ sectors like logistics, retirement housing and energy as well as healthcare, cinemas and datacentres.
Logistics, in particular, offers great opportunities in warehouses in strong locations such as the Midlands and the M25 area around London. With availability at record lows and demand unaffected by the uncertainty, 'this sector looks likely to continue to outperform the rest of the market due to its long and often indexed leases, as well as the landlord-friendly dynamics in the occupational market,' according to Savills.
Development activity is forecast to decline from an already low level and, said Oakley, ‘it will not recover over the next three years.’ The shape of the rental cycle will change: rents are expected to fall in 2017, including in London offices, then be flat in 2018 and gradually recover. 'There will be outperformers like central London retail and London industrial,’ said Oakley, ‘but in general it is great news if you are a tenant rather than a landlord.'
