Richard Pickering, Head of UK Futures Strategy
For the past year, the UK has been in a surreal holding pattern. We know that we are going to leave the EU, but we don’t know what form that will take. Businesses have been sitting on their hands, glancing at each other across the start line. And the property markets, well past the end of a typical seven-year cycle, have been quietly wondering how much longer we’ve got.
By comparison, 2018 is likely to be a year for action. We are starting to get some shape to key negotiations with the EU and Theresa May’s fate is tied to these. There will be no pleasing everyone on Brexit, and the likely result is a soft fudge that will please no one. Markets would, however, welcome a benign economic outcome, and combined with further rate rises we may see the pound rally somewhat. Banks will take space in the EU, but it will be small deltas, rather than exoduses.
There are some clear trends in all sectors that are likely to persist. Digital automation will continue to eat away at roles. Proptech is starting to get real; and new platforms and analytical tools will raise efficiency and transparency in real estate; however, I predict a few white elephants along the way. The serviced office sector is getting hot and everyone wants in – and we’ll see the launch of new propco branded products. In retail, watch out for more innovation, new online-to-offline offerings, and RFID playing a key role in supply chain reorganisation.
In all markets smart buyers will be more discerning, with prices reflecting greater caution. Watch out for more M&A and consolidation among property companies and there is even potential for the UK’s first smart city to be targeted by a tech-co.
London
Richard Howard, Head of London Leasing
Last year surprised everybody with a much stronger performance than had been expected. There were three key reasons for this – constrained supply, significant take-up activity by providers of office-as-a-service leading to a further curtailment of that supply, and better trading conditions for most occupiers meaning a more proactive decision making process.
There is every sign this will continue in 2018, given that a significant proportion of the forthcoming pipeline is either already let or under offer. We will also see even more activity by tech/creative occupiers at scale. Rent Free Periods have already stabilised and will come back in as quickly as they pushed out. Crossrail will start to operate and will have even more impact than people thought – you will have to actually ride from Liverpool Street to Paddington in ten minutes to fully appreciate the changes this new infrastructure will bring.
Coal Drops Yard will open at King’s Cross and will be a retail jewel in the crown for London, let alone the scheme. Battersea Power Station will become more and more of a place as further shopping, restaurant and public realm elements open up.
With the American Embassy operational, and Apple committed to Battersea Power station, the phrase “south of the river” (already inaccurate, as the river is more or less vertical for one of its most significant stretches) will become increasingly redundant. When you think that this description now also takes in The Shard, One Blackfriars, all the cultural offerings from the National to the Old Vic, The Tate Modern to the Royal Festival Hall etc etc), Battersea Power Station, Borough Market and all that will be happening at Canada Water and Elephant & Castle, it seems inevitable that the river will be more and more of a centrepiece than any kind of barrier.
Talking of the river, I would love to predict that London’s governing bodies will wake up to the fact that we have a thoroughfare running through London that is very considerably wider than two motorways, and yet is used to a vanishing percentage of its potential to ease transport issues, and make life more manageable/pleasant for Londoners and visitors alike.
London Capital Markets
Martin Lay, Joint Head of London Capital Markets
On the whole, Central London Investment agents are a difficult bunch to please. Either there’s not enough investment stock available on the market and competition is fierce, or there’s too much stock and the concern moves to a potential softening in the market. During September last year the amount of available stock rose threefold in the City market to reach over £7 billion and the vultures were beginning to circle. The result however is that 2017 saw the second-highest level of investment activity across Central London on record.
Prime yields in 2018 are expected to remain at record levels and even those assets which don’t tick all the boxes are likely to attract sufficient investor interest, so long as they are correctly priced. The predominance of large lot size trophy transactions is expected to continue with a number of these assets already highlighted to be brought to the market in the New Year. Whilst the buyer profile is likely to remain biased to the Far East, capital from Germany, the Middle East and North America is also active. Deal velocity should therefore remain strong, despite the continuing uncertain political backdrop and tightening financial regime, with new entrants continuing to compete aggressively with the more established investors.
South East
Charles Dady, International Partner, London & South East Business Space
Last year was one of caution across the South East office market with HQ lettings conspicuous by their absence. The lack of transactions over 50,000 sq ft in the Thames Valley was unprecedented and in stark contrast to the 10-year annual average of 445,188 sq ft / 5.1 lettings in this size range.
However, with the first tangible signs of progress in the Brexit negotiations now emerging, business confidence is likely to grow during 2018 and longer-term occupational decisions may be back on the corporate agenda.
At the same time, the rapid growth in the managed/serviced office sector is timely and will be an important response to the greater flexibility and agility sought by corporates of all shapes and sizes during a period of continuing uncertainty.
In summary, our 2018 glass is half full and we are predicting a gradual improvement in business confidence, the key factor in occupational decision making.
Logistics & Industrial
David Binks, Head of UK Logistics & Industrial Agency
The Logistics and Industrial markets will continue to perform well this year. In the logistics sector the underlying structural changes to the market will be driven by the ongoing growth in online retailing. In order to meet their customers’ expectations, occupiers will need to adapt their networks to accommodate different working practices, new technologies and to handle reverse flows.
We anticipate demand will return to longer-term average trends as some occupiers have now established networks and are focused on bringing them on-stream.
One of the key trends will be the continued growth in last mile urban logistics as occupiers seek to establish locations within a major urban area from which to consolidate and deliver to customers and shorten the timescale between order and delivery. The parcel sector will continue to grow with the growth of online retailing.
The Midlands will remain a focus for a significant proportion of this demand, however, other locations close to major population centres with good land, labour and power availability will also benefit.
In the industrial sector, whilst uncertainty over Brexit may continue to unnerve occupiers, the prospects of reshoring production, adapting to advances and changes in technology will drive further industrial demand, and we anticipate this will continue in line with 2016 and 2017 take-up rates.
Supply of new product will remain constrained across most size ranges as land for new development remains very limited.
There will be continued upward pressure on rents in key locations where supply is most limited and our expectation is that this will be in the order of 2% – 3% on average.
Valuation & Advisory
Rupert Dodson, Chair EMEA Valuation & Advisory
There will be increasing regulation of real estate valuations, led by the banks seeking genuine independence from their valuer and promoted by professional bodies including the RICS.
The RICS has published a professional statement on avoiding conflicts of interest and is shortly to update its Guidance Note on Risk, Liability and Insurance in Valuation Work.
There will be increasing uniformity in the approach to the valuation of alternative asset classes such as student housing, self-storage and data centres. Those firms of valuers who can demonstrate a track record in these sectors will become the preferred providers to the increasing number of investors and lenders who are focusing on this sector.
The current consolidation in the ownership of shopping centres and logistics properties will result in the need for firms of valuers to recruit as well as automate their processes to service the valuation of increasingly larger portfolios.
Those firms of valuers who hold deep data on the market will expand their offering to an advisory role in modelling the future state of clients’ holdings.
Public Sector
Andrew TC Smith, Head of Public Sector Advisory
Central Government will be interesting to watch in 2018. The move to a centrally-managed estate under the new Government Property Agency (GPA) is in ‘ghost’ form progressing towards a planned launch in the near future. GPA is developing its administrative systems and recruiting to fill key posts as well as engaging with Departments to plan for the transfer of assets to its guardianship. The ‘hubs’ programme, predominantly led by HMRC and DWP, made some big announcements in 2017. The future success of the programme, in terms of broadening Departmental participation, will undoubtedly be aligned to the success of the new GPA model.
In local government, we have seen a step change in Authorities seeking to use direct intervention including direct investment to facilitate economic growth in their regions. We expect this to continue as Authorities get used to adopting their powers under Wellbeing and Localism. The impact of Enterprise Zones will come through, together with wider repatriation of local tax collection to Authorities, and we are seeing new Tax Increment Finance-based interventions and expect this to become increasingly important.
In Higher Education there has been an ‘arms race’ to develop more attractive facilities to attract students. We expect activity to continue to be buoyant, albeit possibly tempered by institutions taking stock of the wider funding environment and scope for future uncertainty. The weight of money and international interest to invest in UK Student Accommodation means this is likely to remain buoyant, albeit as local markets mature it is very much down to local markets and essential to have a robust understanding of these.
In health, there is the need for significant new investment and the sector continues to react to structural change in terms of the publicly-funded elements. A number of important ‘boutique’ markets are emerging in various areas of provision where new models for local government and health partnering are being resolved. These ‘alternatives’ markets are generating keen interest and competitively-priced funding and we expect these will develop and become more important in 2018.
Student Accommodation
David Feeney, Associate, Student Accommodation Advisory
This is set to be a year of continued large-scale investment in new student accommodation developments and refurbishments by both university and private sector providers. Major on-campus procurements will combine with ongoing off-campus development to increase the quality of product available to students.
However, 2018 is set to be the year when affordability truly hits the forefront of developers’ thinking in response to student concerns over the cost of accommodation and debt. This will lead to the start of a design revolution as designers, developers and operators seek to provide accommodation that offers real value and appeals to those currently living in Houses in Multiple Occupation. However, these designs will need to be delivered in an environment of build cost inflation.
Rental increase prospects will continue to be healthy in strong markets for the right products, although the wrong products in difficult markets will continue to struggle to achieve rental increases and high levels of occupancy.
In terms of demand, high levels of competition among universities will continue to mirror those amongst accommodation providers, with those institutions offering value by delivering positive career outcomes best placed to succeed at the expense of those that cannot.
Self Storage
Oliver Close, Partner, Valuation & Advisory
We recorded six significant UK self storage transactions in 2017, totalling just under £200M. While this investment activity suggests a developing maturity of the sector, there is still limited public information on the deals that have taken place and self storage remains a shallow market when compared with many other property sectors, including other alternative markets. Since a number of the larger portfolios have been traded in the last 24 months, and some of these have been taken by competing larger operators, we anticipate that the volume of transactions (in terms of capital value) is likely to be lower in 2018.
Many of the higher-quality assets are held by the larger operators and they continue to be buyers rather than sellers. The asset class therefore remains challenging for investors who are seeking to gain exposure to the sector in scale.
From an operational perspective, the outlook for revenues is for continued improvement and, at the time of our most recent survey, more than 65% of operators expect improving levels of profitability versus last year, in spite of a climate of greater political uncertainty. From our most recent assignments we continue to see solid trading performance at property level.
