As the post-Brexit vote dust begins to settle, initial concerns about the impact on UK real estate are softening and we have a clearer sense of the potential for investors in UK property, although the unexpected election of Donald Trump as US president may have muddied the waters a little.
The UK remains the world’s second-largest real estate market, offering international and home-grown investors a plethora of property, across sectors, to invest in. These opportunities are not limited to commercial real estate in the heart of London. Changing tenant demand in London, increasing consumer demand for swiftly delivered goods and the undersupply of beds all present opportunities to see significant returns.
First, the ripple effect from ‘core’ London presents the opportunity to invest in property on the periphery of the capital and indeed in other major UK cities. We are beginning to see a ripple effect of tenants moving away from London, in response to them expecting rents to rise.
That said, with the current post-Brexit environment, there may be less expectation that rents will rise - hence this activity may be less frequent. This presents opportunities to develop high-quality office space in the UK’s other cities, such as Birmingham and Manchester, to meet demand. Investors can take advantage of the future upswing in office rents that we expect to see in these locations.
On the other hand, as London’s economy expands and the city’s population grows by the 13.7% that the ONS predicts by 2024, demand for office space in the city may increase significantly in the longer term.
Against this backdrop, we can expect the promotion of current fringe locations to ‘core’ status, in time. Those who find opportunities to redevelop and repurpose redundant retail space and impaired offices in these periphery London locations now may benefit from the ripple effect to ‘new core’ London locations in future.
Reverse ripple effect
However, this may be balanced by concerns that Brexit may mean some tenants, especially those in the financial services sector, move to European cities. This could create a reverse ripple effect and provide opportunities to acquire assets in ‘core’ London locations currently out of reach of many investors.
Investors can also capitalise on the growth of online retail in the UK. In the last 10 years, online retailing has added the estimated equivalent of 110m sq ft of trading space, according to Colliers International. While the high street is therefore oversupplied, the logistics sector, for servicing increased consumer demand to receive online orders as quickly as possible, remains undersupplied.
We are currently faced with a drastic undersupply of all types of residential accommodation
In particular, there is an opportunity to develop higher-quality premises that meet specific technological demands from retailers. These premises are currently lacking. Of course, on the other side of the coin, there are also opportunities to repurpose redundant retail space into increasingly popular mixed-use sites, for example combining leisure and residential.
Lastly, the mismatch between our growing population and low levels of available housing presents an opportunity for investors who understand the UK market. We are currently faced with a drastic undersupply of all types of residential accommodation. The UK planning system has failed to deliver the required level of supply, while the government’s policies to boost first-time buying have in turn boosted demand for housing.
Increasingly, as the UK looks to plug this gap, we can expect to see innovative residential solutions that are more specifically tailored to end users. For example, we will increasingly see new-builds that focus on creating a certain environment to match the needs of students and young professionals. We therefore foresee a number of development opportunities in the private rented sector, student housing and other mixed-use developments.
While many are preoccupied with swings in the outlook for commercial property in London and there remains value to be had from this sector, there are numerous investment opportunities across other regions and sectors in the UK.
UK-based investors with the requisite knowledge and expertise are well placed to take advantage of these opportunities.
Manish Chande is senior partner at Clearbell Capital
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