Real Estate

UK property market: Q3 review and outlook

The UK commercial property market is delivering positive total returns but the pace has slowed. What next?
November 2019
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Risk Disclaimer

The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

The value of directly held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment.

Our review and outlook is a marketing communication providing an overview of the recent economic and property market environment. It should not be considered as advice or a recommendation to buy, sell or hold investments. Nor is it investment research and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination.

The UK commercial property market is delivering positive total returns but the pace has slowed.

Context is key
  • Brexit remained at the forefront of investors’ minds, with the political dimension perhaps gaining greater prominence.
  • Economic growth estimates are muted but positive, and inflation is below target.
  • Slower economic growth in the Eurozone and beyond, together with concerns regarding tariff wars, has affected sentiment.
  • However, changes in Fed and ECB policy have also led to a view that interest rates may now remain low for a prolonged period.

 

Property market performance

The quarter again saw retail property dragging down the all-property average. The three main sub-markets of standard retail, shopping centres and retail warehousing all recorded negative total returns. Offices recorded a quarterly improvement, across all segments and with City and provincial offices the strongest performers. Industrial/distribution continued to outperform, with standard industrials outperforming distribution warehousing. The performance of alternatives was broadly unchanged overall but with residential driving total returns in the quarter.

Activity overview

Investment transaction levels rose in the third quarter to be broadly in line with the long-term average. The third quarter numbers were boosted by higher transaction levels in the alternatives sector and for regional offices, with most parts of the market seeing stable or lower levels of activity. Net investment from overseas is positive, while institutions are still net sellers of property. Retail property funds have seen persistent outflows and the issue of liquidity in open-ended funds has come back into focus. However, local authorities are still net buyers as are REITs. Bank lending to property, although volatile, is generally positive.

Risk Disclaimer

The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

The value of directly held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment.

Our review and outlook is a marketing communication providing an overview of the recent economic and property market environment. It should not be considered as advice or a recommendation to buy, sell or hold investments. Nor is it investment research and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination.

Our outlook

At BMO REP, we predict single digit all-property total returns after this year, underpinned by the income return.

The economic and political outlook continues to be dominated by Brexit as the second deadline for departure has passed without agreement. The political situation is unprecedented in modern times and the forthcoming general election adds a further element of uncertainty to the outlook.

Consensus forecasts indicate that GDP growth would be lower in 2020 than 2019, and the 2020 estimates numbers are being revised down. Forecasters expect a recession to be avoided for the full year and for economic growth to improve thereafter. However, Brexit is expected to result in a long-term reduction in economic growth from pre-referendum estimates.

BMO REP forecasts are based broadly on the consensus economic outlook. They assume that some sort of deal is concluded within the next few months but acknowledge the considerable uncertainty surrounding forecasting in the current environment.

We have downgraded the all-property total return estimate for 2019 further to -0.9%. The prediction for 2020 has also been revised slightly lower. Both estimates are below the latest Investment Property Forum (IPF) consensus forecasts. However, we now anticipate a stronger recovery, helped by a regime of low interest rates. For 2021-23 inclusive, we are more upbeat than the IPF Consensus.

This is conditional on some sort of Brexit deal being secured. We would expect further uncertainty or no deal to be negative for property, as would a Labour Government.

With economic growth and inflation expected to be muted, we anticipate a continued focus towards protecting and enhancing long-term, secure income streams. We believe there could be some activity in the more opportunistic space if open-ended funds and shopping centre owners, in particular, are forced to sell stock.

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