Key Themes for UK Real Estate

Key Themes for UK Real Estate in 2016

10 December 2015, by Mat Oakley

In 2016 we expect investor demand to remain strong with promising prospects in the towns and regions outside London


2016 will be a very different year for commercial property investors than 2014 and 2015, with the strong capital value growth story of recent years starting to tail off. We expect to see an increased investor focus on rental growth and income returns, as well as on value-adding strategies such as refurbishment and development.

While we are predicting that the average total return on UK commercial property investments will slip into single digits in 2016 (7.5%), this will still be high enough to ensure that it outperforms many other asset classes.

As such, we expect that investor demand will remain strong, and the overall investment volume in the UK is likely to be slightly lower than the record highs of 2014 and 2015 at £60bn, but well ahead of the long-term average.

Income is King

Institutional investors are increasingly focused on the income-producing aspects of commercial real-estate as an asset class, and we expect to see a rise in demand for longer-income, asset management and alternative asset classes in 2016. However, there are still opportunities out there for opportunistic and short-cycle investors, particularly outside London. Two examples of areas where capital values are yet to correct significantly are small lot sizes across all sectors, and retail property in general.

Typically the average yield on lots of £5m-£15m is 100-200bps higher than it was in 2000 and 2007, and we believe that this is a reflection of a perception that smaller lots are higher risk or lower return. We expect this margin to close in 2016, driven by opportunistic investors buying smaller lots to combine into larger portfolios for eventual sale to an institution. This end of the market also represents a rich opportunity for the private investor.

Retail therapy

Retail property outside London is probably the segment of the market that has seen least yield hardening over the recent recovery. On average retail property yields outside London are just under 200bps higher than they were back in 2007. Clearly there has been some structural change in this sector due to the rise of internet retailing, but we believe that the risks have generally been overstated.

Retailers will experience a strong omni-channel Christmas this year, and the number of new stores being opened by existing retailers and new entrants to the UK market is likely to rise in 2016. Furthermore, the rents in many of the UK’s town and cities have now rebased down to a level where retailers can trade profitably, and this means that the rental growth outlook may well be more solid than some investors imagine.

Beyond the capital

Towns and regions outside London generally look like a strong story for 2016, with recovering local economies, northshoring of jobs from London, and low levels of development likely to combine to deliver better than normal rental growth over the next two to three years. For office investors we expect the best prospects to be the top seven major city markets, with opportunities both for refurbishment and redevelopment, and for industrial investors the best prospects will remain in the under-supplied middle of the country. Local market differentials will be significant, with the best locations for investors being those that combine a low availability of good quality property and a solid and expanding labour force.

Investors in commercial property are undoubtedly going to have to be more forensic in their stock-picking from 2016, and a deep understanding of local supply and demand fundamentals will be the key to outperformance.


Outlook for average commercial rental growth, 2016-2020 % pa

Figure 1

Source: Savills Research


Key Contacts

Mat Oakley

Mat Oakley

Commercial Research

Margaret Street

+44 (0) 20 7409 8781


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