The end of H1 typically marks the start of the summer recess–everyone heads off to sunnier climes while questioning, in quiet disbelief, where the first six months have gone.
This year it seems the UK property market might have to make do with the Great British heatwave as the UK and European real estate markets seemingly do not want to take the traditional break we are used to. Global capital remains extremely active with both domestic and global investors undeterred by ongoing political instability.
In the latest chapter of European politics, Theresa May somewhat unexpectedly failed to win a majority but in reality, very little has changed. CBRE’s latest edition of ‘Uncertainty Unscrambled’ analyses the impact of General Elections on the property market and there is little, if any, historical evidence to show that UK general elections change overall investor behaviour. In fact, we could argue that apart from an impact on currency; the political landscape is often largely ignored.
The second half of 2017 feels like it too will continue at pace, particularly in certain markets, including city centre offices, logistics and all kinds of alternative investment. However, London’s position as the ‘force majeure’ in European real estate is increasingly under pressure from Germany. The major markets there produce large scale investment opportunities with the low cost of debt aiding affordability. In Q1 2017, the German investment market posted an increase of 49% year on year. While London is likely to maintain a dominant position as a city, Germany as an overall market might increasingly be the focus of institutional capital.
An intriguing and perhaps surprising opportunity in the UK is development, an area of the market that is certainly more in vogue than it was 6-12 months ago. Calculated risk, underwritten by prevailing rental growth, is certainly evident in some of our key markets across the UK, including Paradise Circus, Birmingham, the Granada studios site in Manchester and Wellington Place in Leeds. Those regions where land costs remain sensible and human capital is readily available, allowing for tenant growth, generate greater confidence and commitment to leases providing the catalyst for developers to start building again. The launch of 22 Bishopsgate in London provides the best evidence of this–fortune favours the brave and bold decision making should play well into a leasing marketing with cautious optimism.
For the foreseeable future, retail-led logistics continues to be the diversification tool of choice for investors, and what a story this is, attracting global equity and attention. The downside? Well, it goes without saying that the fuelling of retail logistics by e-commerce has had an impact on demand for traditional ‘bricks and mortar’ retail, with confidence in this sector certainly diminished. Here-in lies the opportunity for investors with a long term outlook. While retailer consolidation of the high street continues, the best town centres remain a focus for investors, with significant capital being committed to their development. According to recent CBRE research, feedback from retailers that 83% still require a physical presence on our high streets; this provides a strong case for town centre evolution. The key driver here is infrastructure, whether this be transport initiatives or residential opportunities, either private or build to rent. Regeneration forms the blueprint for the future landscape of our towns. With international investor demand tracking the best local partners to ensure success, this is certainly a market area with focus.
As we head into H2, London is certainly preserving a global status for the international community and interest will remain strong. The wider market is, however, showing signs of fragility, which will undoubtedly mean that overall volumes are not as high as Q1 led us to believe. That being said, if you look back June 24 2016 to 2017, who would have thought £47.8 billion would have traded in the post referendum ‘leave year’?
Predictions in real estate require careful analysis and remain changeable, much like our British summer. My advice–make hay while the sun shines!
By Chris Brett, Head of International Capital Markets, CBRE.
This article first appeared in Property Week.