In 2017 UK commercial property was characterised by the industry largely shrugging off the EU Referendum outcome, resulting in investment volumes and leasing activity in some locations hitting almost record highs.
While risk aversion among investors will continue into 2018, this doesn’t mean they’ll stop investing; it will just affect what they invest in. Core/prime/secure (delete as appropriate) assets will continue to be many investors’ default choice, but a shortage of prime mainstream stock will lead to most assets with bond-type characteristics commanding attention.
With that in mind, here’s our top commercial property picks for 2018, plus some trends that will shape the market:
Strong tenant demand for ‘last mile’ delivery sheds, plus strong competition for sites, will ensure rents in the sector continue to grow. We’re forecasting that income returns will average 4.8 per cent per year over the next five years which, when combined with annual capital growth, places urban logistics at the top of Savills all-sector property table for comparative returns.
With business uncertainty rising the closer the UK gets to Brexit, occupiers will be trying to make clever property decisions to minimise rents while maximising flexibility to cover all possible outcomes from the negotiations. The offices that will benefit most from this will be those that are both accessible and affordable.
Regional office refurbishments
Many regional offices have yet to embrace the trend for refurbished offices seen in the south. There’s therefore the potential for newly refurbished space in these locations to command higher rents and see price rises.
Community shopping centres
While often seen as the poor relation of luxury retail, with pressures on consumer spending, community shopping centres with a focus on value retail could fare well.
Prices for the majority of Scottish assets have remained muted since 2008, so there are bargains to be had north of the border.
Mid-rented retail warehouses
While household spending will slow over the next 12 months, we expect that spending on retail warehouse type goods will still grow at an average of 3.6 per cent a year over the next five years as some homeowners choose to refurbish rather than move.
Value beyond prime
With risk-averse investors dominating the 2018 market, there will be less competition and even falling prices in secondary and tertiary markets offering an opportunity for value-add and opportunistic investors to turn short income into long.
As London’s office market shrugs off the worst Brexit negativity, 2018 will see more balance in the assessment of occupational risks.
2018 will bring better news than 2017 on real earnings growth and a more nuanced attitude to retail property among investors. Some sub-sectors look like an opportunity due to their defensive characteristics, while others just look cheap.
Wellness and staff satisfaction will continue to grow in importance to employers, but some will start offsetting the costs of delivering wellness by using margin-enhancing AI tools – not by replacing staff, but by making processes more cost efficient.
Read more Spotlight: UK Cross Sector Outlook