Property services firm Savills says undersupply of Grade A office stock in London could present an opportunity while a counter-cyclical move into UK retail might also offer something to opportunistic firms.
In its UK Residential, Commercial & Rural 2019 Cross Sector Outlook report and press briefing on Monday, Savills highlighted Grade A London office development as well as UK retail as ‘wise’ and ‘smart’ property plays for 2019.
Savills suggested that new London office development opportunities coming to the market in the next 12 months could be a ‘wise move’, given forecasts that the city is set to suffer a severe undersupply of Grade A office space beyond 2021. At the same time, a counter-cyclical move into retail, where good assets may be available at a discount as part of wider re-pricing in the sector, it says, could also be a ‘smart move’ for opportunistic buyers.
Mat Oakley, head of commercial research, told the press briefing on Monday: ‘I think retail is probably the most interesting segment of the UK commercial property market this year. It is going from being the worst ever year for transactional investment volumes in 2018 to potentially being a very strong year. Pricing has moved firmly in the buyer’s favour and will continue to do so once we are past the inevitable rush of CVAs (company voluntary arrangements).’
He added: ‘This is probably the only segment of the UK commercial property sector where it is possible to spend £2 bn in one go – there are willing vendors as well as unwilling vendors in this space.’
In the residential sector, Savills expects a continued squeeze on the buy to let mortgage market, with cash-rich private investors continuing to shift their focus to markets in the Midlands and the North in search of higher yields and the better capital growth prospects that exist at this point in the housing market cycle. Savills says that momentum in the Build-to-Rent sector is set to increase more widely across the country. Greater familiarity with the sector among policy makers, planners and developers is expected to combine with growing recognition by investors of the ability to deliver competitive income returns by operating at scale.
Focus on fundamentals
Overall, Savills says it expects 2019 to be the year in which real estate investors ‘zero in’ on the fundamentals of supply and demand in the UK market to support secure income streams, placing greater reliance on rental growth to deliver capital appreciation, to reflect the uncertainty surrounding the UK’s economic and political environment.
Savills now expects capital growth to account for just 30% of total returns across all UK property for the period 2019 to 2023, down from its 40% forecast in 2018, and below the average 55% share over the past 10 years, while income returns climb to 70% of total return. This is based on the assumption that the UK does leave the EU, but that uncertainty will remain in the market in the medium-term, and that interest rates rise gradually rise up to 2023.
The firm's predictions for commercial, residential and rural real estate also include a league table forecasting the average annualised returns for various property sectors between 2019 and 2023.
Urban logistics sits at the top of the Savills league table for the second year in a row for having the highest forecast annualised returns over the next five years at 10%, as the sector continues to attract significant investment in the face of strong rental growth.
Meanwhile, businesses that can be diversified and future-proofed offer value in the rural sector. Estates in south east England offer the greatest opportunity for income returns, due to the potential to diversify into a greater number of residential and commercial uses than those in other parts of the UK. Good-quality land and certain livestock enterprises, where productivity is strong and aligned with market demand, should also be resilient to the evolving policy and trade environment and therefore be an attractive pick, it says.
