At the beginning of a new year and decade, property’s leading lights reveal their hopes, expectations and resolutions for 2020 in the second of a two-part special.
European chief executive, AEW
I hope that we see a rebalancing of investor interest and increased appetite for the UK market. The markets have been somewhat distorted since the referendum result in 2016. This has led investors to shy away from the UK in favour of other European countries, notably Germany and France.
The retail market has suffered massively in the last few years, and in the UK in particular. With a more benign UK environment I would expect to see UK retail bottom out. However, I don’t expect a bounce-back that you would typically see in normal cycles given the longer-term structural changes in the market.
With the interest rate environment looking lower for longer, we expect continued appetite for real estate investment. This, combined with sectors that benefit either from structural growth or demographic-driven demand, will sustain or even increase interest in logistics and residential.
We will also see increased diversification into non-traditional real estate in 2020 as investors look for attractive, risk-adjusted returns. Senior housing and student accommodation are already on the agenda and will continue to grow.
Resolutions: Keep up with technology!
Senior managing director, Hines UK
My hope is that we progress beyond political infighting to a new chapter that allows people to feel positive about the future.
For our industry, let’s hope the tide turns for retail and that government provides a helping hand with a meaningful adjustment of business rates.
I expect a hesitant first quarter in the investment market with investors closely monitoring the currency fluctuations. However, I don’t see any let-up in the demand for real estate more generally so I do expect a very busy period from spring onwards.
For London, I expect the flight to quality for office occupiers to hold up rental rates generally and lead to rental growth for the best buildings. Similarly, I think we’ll continue to see rental performance in logistics for the best-located product.
Resolutions: To rebuild Hines’ London portfolio and develop beyond student housing into other forms of residential product.
Senior associate director, Aviva Investors
We expect property owners to have to work harder to sustain income as lease lengths fall and occupiers demand greater flexibility. For example, the shift towards flexible working space is likely to mean that underlying rental income streams reflect changes in market rents more quickly. This implies rental income streams will be more volatile than in the past.
In this environment, investor appetite will increasingly be skewed towards locations with more robust long-term demand. Central London, Manchester, Cambridge and Birmingham, characterised by international connections, deep pools of talent and innovative cultures, look comparatively well placed.
As with continental Europe, pricing is elevated by historical standards for many prime markets. However, the UK property market is still attractive on a risk-adjusted basis, particularly compared with fixed-income assets.
Overall, logistics and office markets look more attractive than the retail sector. Broadly, London and South East logistics and Cambridge and Manchester office markets look to have the most growth opportunities.
The repricing of retail assets is further advanced in the UK, but there is still value to be found given the scale of the structural challenges the sector faces.
All retail sectors, bar the supermarkets, have a challenging outlook. As the property and economic cycle slows, there may be opportunities in long-income-style real estate. Historically, inflation has been higher than open-market rents, and current relative pricing remains in line with historical norms.
In addition, depreciation and maintenance costs continue to affect returns as yields remain low in many traditional sectors.
Resolutions: We have spent a lot of time identifying the most promising central London submarkets. This detailed analysis was to understand what drives our prospective occupier clients’ decision-making. Over the next year, we need to conclude and promote this type of analysis for all sectors across our tightly focused list of strategic locations.
Executive director, CBRE, and co-founder, Real Estate Balance
In 2020, I am optimistic about the future for our markets and industry. I hope some of the uncertainties of Brexit will recede and we see higher investment volumes, with UK real estate again attracting overseas and domestic capital.
I hope we build on the momentum gained to widen the diversity in our industry and that companies in our sector focus more on their purpose and values as well as their financial performance. I hope we contribute more to the climate change debate in meaningful, practical ways to ensure buildings reduce emissions.
I expect higher returns from property this year; increases in rents for prime offices in central London and major regional cities; and ongoing strong demand
for urban logistics. I also expect that occupiers will be more discerning and prioritise factors such as wellness, sustainability, ability to attract talent and amenity in their decision to move space.
Resolutions: To continue to enjoy this industry, celebrate successes and help real estate to attract a broader talent pool. Oh, and of course exercise more, learn Portuguese, reduce my golf handicap and have some great holidays!
Chief executive, AshbyCapital
I hope we return to a more stable business environment and start to see growing confidence from occupiers and developers, leading to more activity in terms of lettings and new innovative schemes being brought forward.
I also hope to see the government delivering on its promise to invest in the UK’s infrastructure, which will be vital to our future prosperity.
I expect a rise in consumer confidence, with retail sales increasing. The way people shop will continue to evolve, creating challenges and opportunities: the convergence of online and physical retail will continue, but additional factors, such as the growing importance of sustainability, will also start to have a stronger influence on what we buy, how we buy it and where we buy it from.
One of the most significant opportunities for investors will be reworking retail portfolios, repurposing assets and redefining retail concepts, and there will be winners and losers.
As Crossrail moves closer to completion, it’s likely we’ll see growing interest from occupiers and investors in areas set to benefit from this major new line.
Resolutions: To grasp the opportunities that should emerge now we have a government that can provide more stability. We aim to do that by being positive, focusing on quality and the end user’s experience and continuing to seek out and work with the best partners.
Fund manager, Schroder UK Real Estate Fund
We hope a potential Brexit deal triggers a new inflow of foreign capital, particularly into the London office market, where yields remain higher than Paris and Berlin. The weakness of sterling may also attract investors from the likes of South Korea, Japan and the Middle East in particular.
We expect the UK commercial real estate market to remain strong despite some investor and occupier hesitancy as a result of Brexit and the economic slowdown.
Retail may have another tricky year. However, retail centres can still thrive if the right investment opportunities are targeted, particularly those that benefit from structural growth drivers such as rapid urbanisation, technology and demographics.
The Lexicon in Bracknell demonstrates this, with the redeveloped town centre adding value through additional office, residential and retail opportunities. We look forward to seeing the positive impact that developments and new lettings at Princess Square and The Deck have on the town.
Resolutions: To ensure the Schroder UK Real Estate Fund continues to be well positioned defensively to meet changes in demand. We will continue to focus our diversified portfolio on the well-performing light industrial and offices sector, and winning cities with large population centres, such as Bristol, Leeds and Manchester.
We are also looking to increase our exposure to alternative assets, such as self-storage, where demand is driven by long-term structural factors independent of the economy.
Head of private markets and real estate, Hermes Investment Management
As a highly active, responsible real estate manager with a long-term approach to investing, we see further opportunities to deliver ‘holistic’ returns by creating great places that are relevant to a diversified range of occupiers and that attract and retain talent, creating optionality to deploy capital over time.
We expect further capital declines across the retail sector, in particular, as much of the existing space is no longer relevant. Managers that address the fundamental drivers of income and have integrated ESG within their analysis should outperform.
Resolutions: Understanding the dynamics of occupational demand remains pivotal to the Hermes approach to deliver sustainable value with the principles of ESG firmly embedded within our investment processes; in this way we believe we are able to measure and manage risk appropriately.
2020 vision: predictions for the year ahead
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2020 vision: predictions for the year ahead (part eight)