GVA Outlook and Risks 2019
19 December 2018The increase in bond yields is likely to be modest and the gap to property yields will remain large. Many investors will adopt a wait-and-see approach in the first quarter of 2019 as a clearer picture of Brexit becomes apparent.
Low supply and robust demand will continue to put downward pressure on industrial yields, albeit at a slower pace. There continues to be investment although there is some nervousness over the depth of occupier demand.
Investors will continue to scale back their retail exposure as the sector battles with the structural shift towards online shopping. On the back of this, retail yields continue to move out whilst capital value growth is expected to remain negative over the next two years. This will create significant redevelopment opportunities for investors willing to take on risk.
The weakening of the pound will continue to create an environment good value for overseas investors although we have already seen a drop off in their exposure outside of central London.
Long-dated income assets with strong covenants remain in demand and provide shelter from the uncertainty in the UK economic market.
Any drop-off in demand for the Private Rented Sector (PRS) would likely see a return in social housing which tends to be counter cyclical as cash-rich housing associations pick up assets seen as too risky by developers.
There is an increasing trend towards city centre living, facilitated by regeneration, improved place making schemes, improved public transport, agglomeration of skilled labour and the cost of living meaning that many millennials are more than willing to offset space for convenience.
The high street continues to suffer from the structural shift towards online shopping with 2018 particularly turbulent for many retailers. This has adversely affected retail property performance.
The distress seen in the retail market is likely to see the opportunities for city-centre living increase as landlords and local authorities look towards increasing footfall in town centres as well as underpinning decreasing retail values.
UK commercial construction activity peaked well below the long-term average and continues in a downward trend. The annual level of new construction orders for retail, office and industrial has now fallen for three consecutive quarters.
Construction across residential and commercial has dropped back and is likely to remain weak, at least until uncertainty around Brexit moderates. The issue is exacerbated by reduced appetite for speculative development from investors, partly due to build cost inflation, but also to uncertainty around the nature of the market and concerns about its potential to lease well in the future. However the lack of available stock for the occupier and limited development pipeline provides opportunities to drive rental values.
Developers, investors and landlords within the real estate industry have all generally been slow to respond to the innovation industry, although the positive rhetoric over the last 18 months has increased substantially. Rigid office spaces, leases and property-use are not an ideal framework for the innovation sector.
Logistics companies are responding to increasing customer expectations, to receive goods faster, more conveniently and at a low delivery cost. With 50% of retailers already offering same-day delivery on at least some of their products, we expect this to increase further during 2019.
The creation of the £675 million ‘future high streets fund’ alongside making it easier to gain permission for conversion of commercial to residential will facilitate redevelopment of under-used retail units on the high street.
