Global real estate advisor CBRE has published its 2019 UK Real Estate Market Outlook report, which foresees a turbulent political scene, driven by Brexit uncertainty, causing hesitation and delay for property markets, businesses and consumers alike. Whilst there is a strong likelihood that the UK and EU will sign a withdrawal deal in the coming weeks, and a reasonably comprehensive free trade agreement will eventually be concluded, CBRE is placing a 40% probability on a ‘no deal’ outcome.
Coupled with political uncertainty, CBRE anticipates a benign but gradually weakening global economic environment, with notable risks around trade and sovereign debt. UK GDP growth in 2019 is expected to be 1.5%, slightly stronger than 2018.
2018 illustrated the resilience of the UK property investment market, particularly in the eyes of overseas investors. As such, CBRE anticipates investment volumes are likely to remain robust at around £65bn for 2019. At an All Property level, CBRE expects total returns of just under 3% per annum for the five years to 2023. Income return will continue to be the mainstay of performance, with a slight rise in rents being offset by a modest overall rise in yields as interest rates end the period higher than they began it.
Sectors to watch
The ecommerce revolution will continue to sustain demand for industrial and logistics space in 2019, with demand for bigger ‘big boxes’ increasing fastest. ‘No deal’ Brexit concerns have not yet been a major force in driving demand and speculative development is starting to address supply-side concerns. Investment demand remains very strong, but investors will need to key an eye on innovations in logistics technology.
Interest in the so-called ‘beds’ real estate investment sectors continues to grow, with rented housing, student accommodation, hotels and healthcare all experiencing growth. They display
certain similarities in terms of operational risk and major supply-side constraints which drive price growth. However, 2019 may see changes in investment patterns. For instance there will likely be significant growth in institutional capital moving to invest in hotels, even as private equity funds remain active in this space. The perceived market and economic uncertainty in 2019 will also drive further interest in healthcare real estate. To date, specialist funds have raised significant new capital to focus on the sector and infrastructure funds have entered the market. CBRE expects a ‘flight to safety’ to drive relative performance and investment volumes in the healthcare market throughout 2019.
For retail, a ‘perfect storm’ of Brexit, business rates, inflation, the growth of ecommerce, and labour cost pressures, will weigh on the minds of UK retailers in 2019. The retail and hospitality landscape will polarise into ‘experience’ and ‘convenience’, with shopping centre owners likely to act to reposition their assets accordingly. Investment volumes are likely to remain low, but pubs, leisure, and roadside retail will move increasingly into investors’ sights as these previously niche sectors become more investable.
Miles Gibson, Head of UK research at CBRE said: “With Brexit not yet done and dusted, rather weak UK growth, and a range of international risks, 2019 will be a challenging year for UK real estate. Whilst there will be some variance across sectors, UK property will nevertheless continue to deliver stable returns, underpinned by a robust income profile.”
Retail Assets to Become More Polarised In 2019 - CBRE
A ‘perfect storm’ of Brexit, business rates, inflation, the growth of e-commerce, and employee cost pressures, will continue to weigh on the minds of UK retailers in the year ahead, according to CBRE UK’s 2019 Real Estate Market Outlook. The retail and hospitality landscape will polarise into ‘experience’ and ‘convenience’, with shopping centre owners likely to act to reposition their assets accordingly. Investment volumes will remain low, but pubs, leisure, and roadside retail will move increasingly into investors’ sights as these previously niche sectors become more investable.
According to the report, uncertainty surrounding Brexit is likely to dampen investor appetites through to Q2 2019. However, a rebounding of investment towards the end of the year is expected as uncertainty around Brexit reduces. Total returns to retail property will remain low, or slightly negative, until 2022 when returns are anticipated to bounce back to around 7%, and 9% in 2023.
2018 saw a sizeable number of retailer Company Voluntary Arrangements and insolvencies, reflecting the pressures felt from minimum wage increases and other labour costs, inflation, business rates and the growth of e-commerce. This is reflected in CBRE’s retail rental forecasts, which show a 1.9% fall in 2019, remaining negative until 2021 when growth will return with a 0.2% uplift.
Tasos Vezyridis, CBRE’s Senior Director of Retail and Logistics Research for EMEA and the UK, comments: “Investment volumes will remain muted until well into 2019, not least because many of the underlying pressures facing retailers in 2018 are unlikely to abate any time soon.
“In-store retailing continues to come under pressure from online sales. The current 18% internet share of retail sales is expected to rise to around 20% in 2019, feeding the demand for logistics space, especially in urban ‘last-mile’ areas. Nonetheless, retail sales volumes are still expected to show a modest increase in 2019 even after allowing for the impact of e-commerce.”
Within the shopping centre asset class, those in the most convenient locations (often below 7,000 sq. m), and those who create a destination appeal for consumers to have a ‘big day out’ (usually over 50,000 sq. m) will see the most significant returns in the year ahead, continuing the divergence in performance. The majority of the 1.28m sq. ft. or 119,000 sq. m of new shopping centre space planned to open in 2019 (including schemes under construction over 100,000 sq. ft. or 9,300 sq. m) will be through the expansion of existing assets. Destination centres will drive this expansion but such centres will increase the proportion of space dedicated to leisure and entertainment, rather than traditional shops.
In response to evolving consumer demand, CBRE expects that owners of mid-range shopping centres, as well as some small and large centres, will increasingly choose to redevelop underperforming retail space over the next year. Some landlords are set to enter the private rented sector market to create additional value from land around some of their assets. This will be supported by a relaxation of planning rules to allow shops to be converted into homes and offices.
Rhodri Davies, Head of UK Retail at CBRE, comments: “While some pressures for retailers will start to fall away in 2019, others including the global economy running out of steam are likely to take their place. This will force retailers to focus even more on cost efficiency and innovation.
“Although the sector is witnessing significant disruption both from cyclical and economic factors, retailers who innovate quickly and invest in the consumer are likely to prove resilient.“