What challenges await our real estate markets this year? I am not sure we can beat last year for obstacles, but despite everything, the market has remained positive.
Driven by overseas demand, especially in central London, 2016 finished strongly, with £4.5bn of deals across all sectors in Q4 and an explosion of capital from the Middle East and south-east Asia.
With demand higher now than before the referendum, it’s easy to feel complacent, but it remains to be seen whether this will continue this year.
We think demand will be good, at least for the first six months. Underpinned by a stronger-than-expected leasing market, which saw Q4 2016 transact a record number of deals of more than 50,000 sq ft, beating all quarter figures since 2014, London remains the key European market for global capital.
A significant movement in pricing and currency has combined to make London real estate appear significantly more attractive than before.
In Q4 2016, CBRE analysis highlighted that £38.5bn of equity was targeting the capital and 2017 has already seen increased demand from Hong Kong, Singapore, Saudi Arabia, Abu Dhabi and South Korea. We also expect demand from German investors to rise in Q1.
The launch of new real estate groups across the Middle East will add further weight to demand in the UK. Middle East capital is very active outside London, evidenced by the Abu Dhabi Investment Authority buying two shopping centres in Slough for £130m along with a number of other regional deals.
We expect this appetite to continue to grow, with greater concentration on office markets throughout the UK.
Capital sources
Looking at new demand, we expect to see more capital from India than before, focusing on commercial real estate and development opportunities. To date, residential assets have been the focus, but as more groups emerge, diversification will become an expectation within these family offices.
Japan is the capital source carrying the greatest level of expectation
However, now that legislation allows the JREITs to invest offshore and the major pension funds are ready to deploy capital overseas, Japan is the capital source carrying the greatest level of expectation. In addition, we anticipate interest emerging from South Africa to move more directly, rather than through listed securities, as constraints on transfer capital offshore loosen.
The demand from overseas investors for joint ventures with local operators will continue and those with existing assets and local teams will benefit from continued demand from global capital sources across the UK and in a variety of real estate sectors. We expect to see an increase in the number of private investors emerging as partners for developers and landowners across Greater London, and in the regional markets overseas capital will continue to gather momentum.
As global capital seeks secure investment options, our logistics market has benefited from notable deals including the purchase of the P3 portfolio by Singapore’s GIC. We believe this trend is set to continue into 2017. Similarly, the best-in-class retail centre operators will attract the attention of SWFs from across the globe.
It would be remiss of me not to mention Property Week’s Call Off Duty campaign. The government’s stance on stamp duty is having a major impact on residential sales and we must all back this campaign to encourage a change.
The momentum experienced in Q4 2016 has certainly carried into 2017 and the UK remains a major focus for global capital. For the foreseeable future, this looks set to continue - that is, until the political landscape is shaken up yet again…
Chris Brett is head of international capital markets at CBRE
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