UK REAL ESTATE SHOULD GAIN MOMENTUM IN 2020 - POLITICAL UNCERTAINTY WILL PERSIST
- Investment volumes should rebound sharply, as the UK remains attractively priced and maintains many structural advantages
- Industrials and logistics set to remain resilient, with robust market fundamentals
- Climate change will continue to rise up the agenda, with more properties aiming for carbon neutrality
- Operational real estate predicted to be a major growth area in 2020
- Uncertainty remains regarding the nature of the UK’s future relationship with the EU despite UK General Election result
The real estate sector should gain momentum in 2020 after a Brexit withdrawal agreement is reached, according to CBRE’s UK Real Estate Market Outlook 2020.
CBRE forecasts that the UK economy will have a slow start to 2020, before picking up in Q2. It forecasts continued real earnings growth, due to record labour participation and unemployment below 4%. However, with job creation slowing and continued uncertainty weighing on business investment, the UK economy is expected to be increasingly reliant on consumer spending.
With the low interest rate environment set to continue, CBRE anticipates UK real estate will offer attractive and solid returns for investors. Across all property, CBRE expects total returns of 4% per annum between 2020 to 2024. Investment volumes should rebound sharply if a Brexit withdrawal agreement is achieved, as now seems very likely. In a reversal of the trend seen for most of the last 40 years, the least volatile mainstream sector for investors will be Central London offices, while the most volatile will be Retail. Further yield compression is expected across European office markets, with London looking particularly well-placed from a relative value perspective.
With the General Election now done and the first stage of Brexit approved by Parliament, the South Coast, in line with the UK, should see a more positive year in 2020. Southampton is set for significant investment and development across the city, and the latest transport plans unveiled this week will dramatically transform transport across the county.
“The strategy, announced by Transport for the South East aims to support sustainable travel across the region, focusing on rail, bus, walking and cycling. The final strategy will be published in April 2020, with a strategic investment plan expected to be announced in 2021.
Several sectors are predicted to outperform across the UK and generate new opportunities for investors and occupiers. After exceeding expectations in 2019, office occupier markets are likely to continue to perform well across the UK next year, with corporate occupiers increasingly using real estate as part of their recruitment and retention strategy. Office-based employment, which has grown rapidly over the past two years, is set to continue to expand in 2020, albeit at a more moderate rate. The war for talent will drive the occupational markets, with increasing demand for new, high-quality space. Given the supply of such space remains low, further rental growth is predicted in 2020.
The industrials and logistics sector is set to remain resilient, on the back of steady demand for logistics space and the sustained growth of e-commerce. Industrials and logistics rents are expected to continue to outperform other sectors. Next year could also see the first multifamily assets trade hands in the UK, rather than the high volume of forward-funding transactions seen in the market up until now. With developments set to spread throughout the UK, CBRE predicts investment in multifamily will increase by 30% in 2020.
In the retail sector, CBRE expects a continuation of the current challenging environment from a combination of structural (changing consumer spending preferences and the growth of e-commerce) and cyclical (wage growth above inflation and EU workforce shortages) factors. However, CBRE expects retailers who redevelop and reposition excess retail space for alternative uses to survive and thrive in 2020. Health and beauty will continue to benefit from increasing consumer interest in wellbeing, while the food and grocery sector will perform well as convenience remains the top driver for consumers.
Operational real estate, including student accommodation, healthcare, leisure, hotels and petroleum and automotive, is set to be a major growth area in 2020, with an increasing volume of deals in the sector and the emergence of specialist and core funds, with a greater allocation of institutional capital into operational real estate. Drivers include the continued slowing of the traditional real estate sectors, the shift in focus to non-core markets as balancing real estate capital in core markets remains challenging, and the decline in lease lengths and capital growth through rent reviews. CBRE expects the trend of the ‘hotelification’ of real estate to continue in 2020, as property investors align with best-in-class operating partners to drive volume and pricing.
Climate change will continue to rise up the agenda for real estate investors and developers. As a result of increasing social, political and regulatory pressures, CBRE predicts that carbon neutrality will become an explicit goal for real estate decision-makers in 2020. The real estate industry will move towards a more holistic approach to tackling climate change, with the environmental impact of every stage of a building’s life cycle considered – ranging from the sourcing of raw materials to redevelopment. With increasing activism amongst shareholders and clients, CBRE expects most real estate investment strategies to incorporate carbon neutrality during the next year.
Whilst the outcome of the UK General Election ends a prolonged period of political uncertainty, it is important to remember that the bigger Brexit negotiation – concerning the UK’s long-term relationship with the EU – is still to come. Even so, real estate investors and occupiers can expect 2020 to unlock fresh pockets of opportunity beyond the traditional real estate parameters as the ways in which we use the built environment continue to evolve. Global and domestic uncertainty means that the UK economy is likely to experience a slow start; but there are positive trends that will support growth, including a tight labour market, rising real wages and a fiscal boost.