What does 2017 hold for the UK real estate investment market?

8th December 2016

According to the latest report from Savills, the unexpected political events of 2016 will lead to a rise in caution and risk aversion among real estate investors in 2017, making secure income streams more highly prized among core investors globally.

This is expected to benefit the UK market, where high levels of transparency and stable legal structures make real estate a safety play.

The international real estate advisor unveiled its predictions for UK real estate at its annual cross-sector briefing, taking a detailed look at the commercial, residential and agricultural markets.

The overall story for UK real estate is one of slower growth.  Average UK house prices are expected to remain stagnant in 2017, before rising by 2% in 2018 and 5.5% in 2019 to a total of 13% by the of 2021. A supply / demand imbalance means rents will outperform house price growth,  rising 19% over the same period.

In the commercial market, average total returns on UK property investments are likely to be approximately 5.6% per annum during 2017-2021, with a 0.4% five year capital growth forecast for office values and a 4.4% growth forecast for office income returns. Savills also forecasts 32% average five year capital growth for GB forestry and 5.5% average five year capital growth is forecast for GB farmland.

Commercial property assets with long lease structures and strong rental covenants will continue to attract attention, while institutional investor appetite for large residential portfolios is expected to continue to grow. The relatively high yields and strong income flows from commercial property will continue to attract strong demand, says Savills.  Greater risk will mean a strong focus on sectors where the fundamentals of supply and demand are most insulated such as retirement housing, logistics and energy.

For opportunistic investors the continued ultra low interest rate environment will limit the extent to which distressed assets hit the market. These investors will instead look towards development markets, particularly mixed use opportunities linked to infrastructure improvements. The changed attitude to risk is likely to mean a less crowded market place for the value-add investor, particularly if lender caution results in tighter borrowing criteria in the development sector.

Mark Ridley, Chief Executive Officer, Savills UK and Europe, says: “'Expect the unexpected' is now the normality, not the exception, on the world stage. Despite this, property remains a fundamentally safe asset class, giving strong income returns and, in many cases, is a refuge for capital preservation in the longer term, its appeal remaining resolute.

Nationally, the markets continue to appear robust in all sectors, although there remains some hesitation on what Brexit will mean in the financial markets, around biomed and also in an agricultural market place without EU subsidies. The sterling devaluation has made UK property very attractive for international investors pegged to the US Dollar or Euro, with 2017 activity in Central London likely to be dominated by Asian investors, with American and Pan-European investors also strong nationally.”

Residential predictions for 2017 and beyond:

 Average house price growth will be low over the next two years, but an extension of the low interest rate environment will prevent a price correction. Mainstream house price growth is likely to rise 13% by 2021, with East of England the top performer at 19%, the North and Scotland averaging just 9%

The EU referendum vote has compounded the stamp duty effect on prime residential property, signalling two flat years before a return to trend growth in 2019.  Prime markets are likely to outperform the mainstream over the next five years to the end of 2021

Transaction volumes will fall 16% over the next two years, recovering to 2016 levels by 2021, but individual buyer groups will be impacted differently. Lower transactions are expected to continue driving demand into the private rented sector from frustrated would-be home owners

Opportunities for private investors lie in restoration projects in the commuter belt where value can be added to take advantage of the price gap between London and elsewhere, and buy to let properties in university towns where student lets offer good yields and where values have been slow to recover

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