CBRE OUTLOOK: UK PROPERTY WILL PERFORM UNDER PRESSURE IN 2017
- UK economy will continue to grow throughout the Brexit negotiation period: CBRE forecasts 1.5% GDP growth in 2017 (as fast as the US in 2016).
- UK job growth likely to continue, but less strongly than in recent years
- Inflation comes to the fore as a new risk for occupiers, particularly in retail
- Bond yields will continue to rise but property (including in London) will remain attractively priced for investors
- Total returns (IPD All-Property) forecast to be 1.1% in 2017 but 6-7% pa thereafter. Income will return to the fore as the main contributor.
- Investment of just under £50bn forecast for 2016, but activity will be more subdued in 2017.
- Although there are likely to be fewer sellers of real estate, there is strong demand among buyers for property which features stable long term income.
- Industrial property, housing, and newer asset classes likely to become even more popular among investors due to different drivers and lack of supply
- Debt availability remains good but development finance will become more scarce hindering new supply
London 12 December 2016 - The UK property sector will continue to look attractive to investors against a backdrop of continuing political and economic uncertainly, according to CBRE’s 2017 Outlook report released today.
CBRE’s 2017 Outlook report provides a comprehensive overview of the political, economic and investment arena for UK property in 2017, examining both core sectors and specialist asset classes.
The effects of Brexit are likely to dominate 2017, but will be far from the only factor. A weaker currency and a tighter labour market will mean inflation now becomes a much a more prominent risk factor, which markets are already ‘pricing in’.
The UK’s economic fundamentals remain strong. The UK ends 2016, and enters EU negotiations, with an economy growing at around 2.1%, record levels of employment and surprisingly high business and consumer confidence. While CBRE does expect 2017 to be weaker – not least as unemployment reaches record lows – its forecast is for continued GDP growth over the next two years at 1.5% in 2017 and 1.3% in 2018. This growth will be reflected in occupier demand for property.
Despite this weaker outlook, appetite for UK property is likely to remain strong, particularly from overseas investors for property in supply-constrained markets with long income and good covenants. However, uncertainty over the outlook is resulting in some sellers adopting a ‘hold’ strategy. So CBRE expects investment activity to be subdued in 2017 before recovering in 2018.
CBRE’s all-property returns forecast is 1.1% for 2017 with income moving to the fore as the main contributor. We expect total returns to recover to healthier levels of around 6-7% from 2018 onwards as recent capital value falls are reversed.
Returns will outperform in those markets short of supply (such as industrials and residential) and those markets with drivers less affected by Brexit (such as healthcare and student accommodation). These emerging sectors are likely to experience even strong investor interest than an already-strong 2016.
There is certainly some cause for optimism when we look ahead to next year with property expected to perform despite ongoing political and economic uncertainty. 2017 won’t be without its challenges and while the market will without doubt require informed and precise navigation, we are confident that investor appetite for UK property will remain strong, particularly from overseas. We actually expect to see some sectors such as industrial property out perform in 2017, whilst housing and newer asset classes such as healthcare and student accommodation will become more prominent on investors’ wish lists.
2017 will be anything but boring. Political and economic pressures will put the property industry under pressure to perform next year. Rising inflation and bond yields, a tighter labour market and Brexit will seem like major forces ranged against performance. But on closer inspection we think property is likely to be rather less embattled than many might think. Although the demand side will unquestionably be a little weaker, supply shortages in many sectors, non-cyclical drivers in others, risk premiums that still look attractive, a general flight to safety, and the structural attractiveness of the UK, all add up to an ability to continue performing under severe external pressure.
Slowing employment growth will tip the balance of supply and demand in office markets, with rental growth faltering in some markets. Financial services occupiers look to be among the most exposed to Brexit, but many markets have been rebalancing to other occupier types which provide more resilience.
Stronger than expected retail sales and consumer confidence will send retail into 2017 in good heart. However there will be no let-up in the need for retailers to adapt to a changing retail environment, with higher inflation, business rates revaluation, relentless technological innovation, and growth in e-commerce piling on the pressure. Prime ‘experiential’ retail will however continue to perform well.
Industrial & Logistics Outlook
2016’s stand-out sector looks likely to have another strong year in 2017. Investors and occupiers will be on the look-out for specific Brexit impacts, particularly from inflation and uncertainty over the trade outlook – as well as taking the upside of the continuing retail revolution.
Housing Outlook (including student housing)
We predict continued growth in house prices in 2017, though at lower levels than 2017. Outer London and key regional cities look likely to outperform.
The Chancellor’s Autumn Statement will assist on the supply side, but public cash is backloaded towards the end of the Parliament, so new supply will take some time to come through.
Student housing also shows clear signs of resilience to Brexit with only 6% of UK students from the EU, and plenty of undersupplied student locations.
Hotels and pubs
Hotels look likely to outperform in 2017, supported by a weaker currency and innovation in hotel concepts. The supply pipeline is significant, particularly in London, but we expect investment in hotels to buck the trend and see an increase in 2017 compared with 2016. Pubs remain a specialist asset but yields are relatively attractive and the pub companies themselves are increasingly commercialising their real estate. New pubs and the Market Rent Option provide interesting new avenues for investors.
Bucking the wider trend, healthcare investment volumes in 2016 are likely to turn out at or above 2015 levels. Integration of social care and healthcare holds out the prospect of consolidation of real estate, and Retirement Living continues to be an area of interest.
London will continue to dominate the European real estate market with 44% of the total capacity across the major markets. The growth of the cloud service providers is the trend to watch, while data protection issues arising from Brexit could present challenges for the sector if the regulatory framework changes significantly.