Knight Frank, the leading independent global property consultancy, has made its commercial real estate predictions for 2018. Partners from across the business have given their considered view on what they believe is going to happen in their markets next year, with an overview from Senior Partner and Group Chairman Alistair Elliott.
Alistair Elliott, Senior Partner and Group Chairman: “Whilst there will be much in the geo-political environment to pay attention to and the environment therefore uncertain, it is also the case that the pace of change has never been greater and the real estate markets never more dynamic. Looking at 2018 the main risks must be a significant shift in the UK administration, a negative shift in the Brexit process or some unforeseen global calamity.
“The challenges will be around the further weakening of the secondary retail markets, the pressing need to address the near desperate housing crisis which must be public sector led, much needed ongoing investment in infrastructure and the prospect of government taking an even more aggressive stance on the tax take in relation to real estate which must now be near a tipping point.
“Solid expectation remains across the UK for offices, logistics and the range of alternative sectors especially PRS. We predict that the ongoing change in work patterns and the attractiveness of mixed-use development will hand in hand present greater development opportunities for next year and into the future.”
James Roberts Chief Economist: “My tip for a contrarian investment in 2018 is Central London offices. At present, many investors are assuming a worst case scenario on the impact of Brexit, largely based on the political instability in the UK. However, the political instability counts against a hard Brexit actually happening. There is not a Parliamentary majority for this, and there is a myriad of practical political and economic reasons why a hard Brexit is unlikely.
“This, in my opinion, increases the likelihood that the final deal with the EU is a political fudge, a Brexit in name only, which allows the banks to keep most of their operations in London. At this point – perhaps around Q3-Q4 of 2018 – we could see a surge in investor appetite for Central London offices.”
Specialist – Healthcare, Hotels, Automotive
Julian Evans, Head of Healthcare Hotels & Leisure: “The UK care market is facing an imminent crisis as the sector struggles to cope with a national shortage of beds. Our research estimates that circa 6,600 care homes are at risk of closure over the next five years, which equates to 140,000 beds. It will cost approximately £15 billion to build the new homes to replace these beds. We believe that there is c£3.5 billion of UK private equity and c£20 billion of overseas private equity looking to enter the care home market. 2018 could be the year this is as last deployed.”
“I also believe that the Infrastructure funds and global investors will start to acquire UK healthcare and Hotel portfolios as seed platforms for REIT targets.”
Shaun Roy, Head of Specialist Property Investment: “The long income annuity market has had a very positive year with pricing having hardened across the board. This is despite a Base Rate rise and the prospect of more (gradual increases) to come. So long as commercial property provides a very attractive proposition to the fixed-income markets we will continue to see the large volume of equity chasing these types of deals, which will by definition continue to compress pricing. Any dramatic shift in rates or Gilts, which we don’t predict, will have the opposite, softening effect on pricing.”
“We will see the increasing attraction of the management contract hotel market to Institutional investors. We have seen funds get comfortable with the operational exposure of the direct student market and I feel that hotels will have their moment in the sun come 2018.”
Adam Chapman, Head of Automotive: “On the back of record-breaking new car sales last year, the slowing down which has taken place this year was widely anticipated. This ‘correction’ to more sustainable levels is a welcome sight for many, and will make for a more stabilised market. In 2018 dealers will benefit from more ‘realistic’ sales targets from car manufacturers, resulting in improved profit margins. Demand from the occupational and investment markets will remain strong.”
Global Capital Markets
Anthony Duggan, Head of Global Capital Markets Research: “We remain ahead of the consensus for total returns in 2018 with a forecast of 7 per cent. We expect transaction volumes to remain robust as demand for UK real estate continues to be supported by a variety of capital sources such as overseas investors, UK funds, listed equity, public sector entities and a growth in lending. With lower levels of capital value growth next year, investors will be focusing on maximising income returns or looking to value-add type opportunities. Indeed, appropriate vehicles will start gear up for selective development activity as supply pinch points appear.”
Industrial
Charles Binks, Head Logistics and Industrial: “In such a dynamic market, we expect to see continued demand from pure play online retailers, as Christmas sales show the sustained growth in internet sales at the expense of the high street. As exactly what Brexit means becomes clearer we will start to see increased enquiries from European- based companies looking for a post-Brexit UK base. We will also see the rapid growth in the use of electric/hybrid delivery vehicles in London.”
Retail
Stephen Springham, Head of Retail Research: “Retail is not out of the woods yet by any means – 2018 is likely to be just as challenging for the UK retail sector as 2017 has been. Some pressures may have eased but there is no greater sense of certainty than there was 12 months ago. Almost without exception, retailers remain cautious.
“The three key headwinds UK retail faced in 2017 will continue to play out in different ways in 2018. On the positive side, many of the post-Brexit inflationary pressures have now annualised and will increasingly drop out of the equation. However, the business rate revaluations are continuing to work their way through the system, with Central London particularly at the sharp end. On the negative side, April will see another step increase in the National Living Wage.
“There will be little respite for UK retailers and most remain on a mission to cut costs. Expect further rounds of staff reductions and operational rationalisations. Retailers will continue to right-size their respective portfolios, and this will entail a rolling programme of closures and downsizings, counterbalanced by selective re-locations and strategic new openings. But the backcloth of cost sensitivity will provide little stimulus for rental growth generally.
“Retail occupier markets have generally proved more resilient post-Brexit than retail property markets, which tend to be more influenced by sentiment. While occupier markets will remain challenged in 2018, retail property investment is likely to see a recovery. Investors increasingly looking for income are likely to target Retail over other major property classes – Retail is now a stronger source of income return than either Offices or Industrial.”
Scotland
Alasdair Steele, Head of Scotland Commercial: “Edinburgh is growing into its role as a significant European capital city. With a burgeoning technology, media, and telecommunications sector; world class universities; and one of its most prominent developments for years underway, the St. James Quarter, Edinburgh will continue to go from strength to strength – provided political stability remains.
“The city’s biggest challenge will be to bring forward new development sites for offices. There are currently precious few to alleviate the disparity between supply and demand in Edinburgh city centre, with the former at near all-time lows and the latter at historic highs. That dynamic has created a strong buying market, with huge demand from investors. Glasgow, meanwhile, continues to show relative value compared with other regional UK cities, which should help it build on a strong 2017 for investment.
“Away from offices, despite a buoyant market, retail warehousing and industrials still look cheap in Scotland compared to assets south of the border. We anticipate that gap closing as the market continues to heat up and yields sharpen. And, notwithstanding the recent changes to capital gains tax, we expect strong flows of overseas money to continue, with stability and attractive leases on offer for investors seeking out long-term, inflation-proof growth.”
UK Regional Market
Matt Phillips, Office Head Wales on the UK regional market: “The Knight Frank regional business is incredibly busy across all service lines and we have not seen this slow down despite all the wider economic and political uncertainty. Fundamentally, the supply of good quality commercial space remains constricted which is resulting in rental growth and a hardening of yields which is helping fuel investor appetite and pricing. The biggest winners to date have been those regional cities that have City Centre development activity which are appealing to occupiers who are focussed on wanting amenity rich buildings in close proximity to public transport.”
Eamon Fox, Head of office agency Leeds: “£30 psf will be the new headline rent in Leeds during Q1 2018 and will become the new normal for Grade A. Net absorption of office accommodation will continue to increase and, due to a limited development pipeline, there will be a pinch point on availability. 2018 will be the year of the refurbishment, as there is no new build coming through, but there are some very well-placed high-end refurbishments.”
“The continued growth of tech firms will emerge and will account for 30% plus of our market in 2018. We will see a continued blurring of the lines between corporate and tech firms, as they merge and breed and a new species of firm is conceived.
“2018 will also see the rise of the ethical firm. Led by the millennial generation, we will see more property transactions support a wide range of charities, social enterprises and small local organisations through the provision of modern, affordable and flexible workspace. The lines will be blurred as corporate meets social.”