What is the outlook for UK real estate?

Prospects for price growth across all sectors will remain positive in the year ahead.

10 February 2015, Words by Savills Research

 
Commercial view

The major theme in the UK commercial property market in 2014 will be a more widespread recovery. 2013 saw a continued robust pickup in tenant and investor demand for all types of commercial property in London, but we expect that 2014 will see this interest widening to cover the key regional cities, distribution hubs, and regional malls.

This recovery will be driven by improving business confidence on the back of the better domestic and global economic outlook.

We expect debt markets to loosen slightly, though finance for speculative development and tertiary investments will remain virtually non-existent outside London.

Risk-averse international investors will continue to be heavily biased towards the capital city, but some will be tempted to the regions by higher yields and less competition. The more risk-embracing investors will be looking to capitalise on the historically wide spread between London and regional yields, as well as the even wider spread between prime and secondary.

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Residential outlook

2013 saw a revival in the UK housing market with increased buyer numbers taking advantage of low interest rates. Further short term price growth is likely to be driven by strong buyer sentiment underpinned by an improved economic outlook. Beyond price growth prospects will be dependent on earnings growth given an erosion of mortgage affordability due to rate rises.

With the potential impact of Help to Buy limited by lending criteria and the ability of borrowers to meet them, the demand for rental accommodation is likely to continue to be underpinned by a lack of accessibility to home ownership. Households in the private rented sector are expected to grow by one million in the UK over the next five years presenting a significant opportunity for institutional investment.

Prime Central London has been the best performing residential market since 2005, fuelled by wealth from the financial services sector and strong overseas demand. In 2013 price growth slowed in response to stamp duty changes. Further political focus on high value property taxation is likely to temper pre-election demand, with the tax policy adopted the next government determining growth prospects immediately thereafter.

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Agricultural perspective

We expect further growth in UK farmland values in 2015 but the market will continue to be diverse and a clear understanding of local market conditions will be critical to both buyers and sellers to ensure realistic expectations. There will be factors that are likely to dampen the rate of growth.

Agricultural incomes are inversely correlated to economic growth and continued improvements in the economic climate will put some pressure on farm incomes and therefore capital and rental values across all sectors.

We are already seeing pressure on commodity prices and this is likely to continue into this year affecting farm profits and cash flows and may lead to increased supply at a local level.

Uncertainty will be a key market factor in 2015. During 2014 the Scottish Referendum and proposed Land Reforms had a significant effect on the Scottish market, both in terms of reduced activity and stifled value growth. No doubt these political concerns in Scotland will continue into 2015, and across the UK the outcome of the General Election will create additional market uncertainty.

However, the fundamental factors driving UK farmland value growth remain. Supply is historically low, the product is finite, competing land uses and diverse ownership motives all ensure value growth remains positive.

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Key Contacts

Lucian Cook

Lucian Cook

Director
Residential Research

Savills Margaret Street

+44 (0) 20 7016 3837

 

Ian Bailey

Ian Bailey

Director
Rural Research

Savills Margaret Street

+44 (0) 207 299 3099

 

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