Andrew Westbrook

Written by: Andrew Westbrook

Andrew Westbrook

Partner, Head of Retail

Will 2018 be smooth sailing for the property sector?

  • March 2018
  • 3 minutes

One thing is for certain, the UK is still a key centre for global real estate activity. RSM’s 2018 Real Estate 360 survey confirmed this, showing that eight in every 10 investors will focus activity in the UK over the next two years.

Overseas investors continue to see London as a safe bet. Savills found international capital supported eight out of every 10 transactions in 2016. Chinese investors were behind many, despite looming restrictions on capital outflows. Domestic investors are meanwhile focusing on top regional cities to improve yields and create value, with Manchester, Leeds and Birmingham being clear frontrunners.

In recent months, government commitments have helped spur real estate activity. Updated planning rules and tax reliefs means brownfield sites are becoming increasingly popular redevelopment locations. At the same time, major infrastructure projects, such as HS2 and Crossrail, continue to fuel growth across the regions.

Finance options are also buoyant, despite the 0.25 per cent rise in UK interest rate. Debt financing is still cheaper than earlier economic cycles and is still the favoured choice for 74 per cent of our survey respondents. We’re also seeing more investors use alternative funding to kickstart projects, and then refinancing with traditional bank loans further down the line. This trend is likely to continue in the year ahead. 

That’s not to say that Brexit isn’t creating challenges. The office market was already suffering from persistent residential conversions and a dwindling supply of good-quality stock. Now, as many businesses review their head office locations, the sector must get ready for even more challenges ahead. 

Prime residential and retail markets will also suffer. Major business failures have long been predicted, but now the reality of cost headwinds and competition has started to bite. In the leisure and retail market, high-profile names, such as Byron and Toys’R’Us, were the first casualties. Investors that rely on these sectors must be wary when considering potential tenants.

Owners and asset managers must also stay alert. Businesses that haven’t remodelled will struggle. Business rates hikes, national living wage increases and sustained higher foreign currency costs will make failures more likely. Occupiers are feeling the pinch - investors in these sectors must start to prepare for downward pressures on rent and values. 

In this new era, proptech will increasingly move to the fore. Right now, it’s a hot topic of conversation, but its application varies significantly. Some think it will transform how property is used and traded. Others think it will help control building costs as well as fuel a rise in so-called smart buildings and adoption of artificial intelligence (AI) to improve employee productivity.

We’re already seeing employers use AI solutions to manage workspace for their teams, reduce the space they need and rollout more flexible working. The combination of proptech and AI offers a chance for occupiers and landlords to control and reduce property costs and overheads. This will become increasingly important as pressures continue. 

So where does this leave us? Many are now cautiously optimistic about 2018. Investors and developers may be scrutinising investments more than ever before, but they are still looking to invest. 

The real estate market in the UK still holds many opportunities for income and capital growth. But attention is turning to new places. A shift to income-led investment strategies means Private Rented Sector (PRS), industrial and healthcare projects are now mainstream investment vehicles.

Successful investors will diversify their portfolio, have strong cost management practices and focus on locations where value can be unlocked.

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