Just a fortnight into 2015, it is disappointing to see so much pre-election grandstanding, especially by those who knock the UK economy, which is in its best shape for years.
This is creating unnecessary uncertainty and the fear is that the first half of the year will be subdued from an investment standpoint. Having said this, the same uncertainty will create opportunities to exploit the arbitrage on pricing of assets.
Naturally, I shall be keeping my glass half full. Last year’s Scottish referendum and the chancellor’s Autumn Statement caused ripples, but not waves. We know this year will be more highly strung, but we come into 2015 with a positive view of the UK economy, based largely on the economic buoyancy of the year just passed.
So how do we make the most of the year ahead and what should we be targeting?
We believe the market will be largely led by a growth in rental value due to supply and demand issues, rather than growth in yield compression. Having scoured industry data and taken into account our house view, here are a number of key predictions:
Sector rental performance
Employment and consumer spending growth will likely drive continued take-up, with deals triggered by expansion rather than lease renewals. Central London retail and office properties will continue to grow (albeit at a slower rate than last year) but this will diminish from 2016.
London industrial properties will see the same amount of rental growth in 2015 as in 2014, while in the South East, offices, regional offices and UK industrial and distribution properties will see increased rental growth during 2015.
Distribution properties will continue to feed off the growth of internet sales. There may be some growth in retail but this will be very location-orientated.
Commercial property yields
Following the government’s relaxed planning rules for office-residential conversions in 2013, there is a shortfall in the amount of office space available, particularly in Greater London.
We anticipate that office portfolios will perform well in 2015 due to high demand, with fringe areas much sought after. However, the central London commercial investment market, although perceived to be overheated, remains very attractive to overseas investors.
The stamp duty reforms will be significant in the residential housing market and we expect the UK’s sub-£1m, mid-tier housing stock to enjoy increased liquidity during 2015, as buyers err away from the high transaction costs of premium property. We therefore believe that the regions will see a rise in property values as buyers move away from the costly London market.
Another side-effect will be an increase in demand for new loans targeting this tranche of the market. The prime residential market has slowed, not least because of ongoing tax disincentives, but there will always be demand to ‘park’ capital in London. Indeed, the ‘touch and feel’ of bricks and mortar shows little sign of retrenching.
The regions will perform well in 2015, with the stamp duty land tax reforms and boosted consumer and business confidence filtering out towards the fringes. Institutional investors appear to have identified the regions’ potential, highlighted by 2014 transaction volumes that outstripped those in London over a 12-month period. This trend is likely to continue as central London remains expensive to UK institutions, private equity and private buyers.
While 2014 was a year of diversity for the real estate debt market, with more alternative lenders meeting growing demand, 2015 will be a year of consolidation for this diversity. Many in the industry have expressed concerns about the lack of regulation in the alternative market; we believe the industry will mature as it grows.
Manish Chande is senior partner at Clearbell Capital