There were plenty of headwinds facing the property sector in 2018, with Brexit and broader geopolitical turmoil causing investors to pause for breath. Whilst buying decisions have in some cases been put on hold, commercial and residential real estate have remained broadly resilient in the face of uncertainty, delivering solid performance in comparison to traditional assets like equities.
Market uncertainty, coupled with the ageing property cycle, will be playing on investors’ minds. I expect these trends to persist into 2019 and to continue to halt buying decisions in many instances. Yet for those looking for more positive news, I believe the current environment presents exciting investment opportunities across real estate sectors going into 2019.
In my view, some of the best opportunities this year will include repositioning of office space in the regions; retail warehousing due to the fallout from retail woes; and identifying opportunities for development in London amid Brexit concerns. Further afield, alternative real estate, which plays into structural long-term trends, will also continue to attract investor interest. This is a particularly attractive option for investors looking to shelter from market movements.
Repositioning of office space in the regions
There are a countless number of booming business communities across the UK, yet not enough quality office space to cater to this. Continued opportunities are likely to arise in key regional cities due to the ongoing lack of supply. Prime space for existing businesses in the regions has been snapped up, yet demand remains. Investment interest in regional office space remains buoyant as a result.
In particular, there is a shortage of Grade-A supply, as successful businesses are increasingly demanding more sophisticated office accommodation. There is therefore an opportunity for investors to improve secondary space to meet this growing demand.
Amid this already under-supplied market, businesses in the regions are benefiting from the government’s existing industrial strategy, which will continue to drive growth in these areas. This growth is already being felt, with 600,000 new businesses created in the UK in 2017 alone. The Knight Frank Regional Office Market Review 2018 also showed that office take-up across key regional cities was 24% ahead of the ten-year average in 2017.
Fallout from retail woes
Many will remember 2018 as the year when the death knell sounded for the high street. However, investors should not completely turn their backs on the sector, as a number of opportunities remain. For example, the right kind of retail could generate attractive returns for investors. Out of town sites should remain front of mind for investors, as many continue to see significant footfall. This includes bulky goods retailers, such as homewares and electricals, where customers want to try before they buy. Some of these sites are being put to work as retail warehousing for such goods. Existing sites and buildings have also become potential targets for alternative uses such as storage or logistics and can be put to use for retail. I expect this trend to continue in 2019.
We are also likely to continue to see opportunities in the industrial and logistics market, though the opportunities will be of a different kind. With the Amazon-effect requiring more warehousing close to urban areas and investment into this sector thriving throughout 2018, investment in logistics is starting to look expensive. Despite the heavy repricing of logistics assets over the past 12 to 24 months, there are still opportunities to be found in secondary rather than prime markets. Improving existing, run down logistics sites to suit tenants’ requirements are where investors should be looking to capitalise on online retail success stories.
London development opportunities in the face of Brexit
With the jury still out on Brexit, we expect capital values in the city to fall in the midst of uncertainty. Whilst many will put off buying decisions until the future is clearer, London still provides opportunities for those willing to invest in projects where development is needed. According to Savills, looking across all commercial property sectors, London retained its crown as the world’s most popular destination for cross-border investment into real-estate in 2018.
The emergence of opportunities to build in London, particularly near new or planned major development schemes nearing completion, transport hubs and other forms of infrastructure, is another trend that we expect to see in 2019. Although Brexit uncertainty remains concentrated on London markets, it is also likely that there will be potential risk-off opportunities in London, particularly on the fringes of the capital.
Alternative real estate
Lastly, alternative investments are a continued area of interest for investors, given the shelter these assets can provide from market moves. This sector is also benefiting from structural and demographic changes, which are helping to create a new economy. The impact of an aging population, the growing influence of millennials on the market, and urbanisation are just a few of the ongoing trends that are helping shape the alternatives market.
For example, an aging population is widening the gap in the market for quality care homes, retirement homes and assisted living developments. Retirees are becoming increasingly sophisticated when choosing their next homes but are finding few quality options to choose from. In 2019, there is a real opportunity for investors to fill this gap in the market, which is expected to provide long-term returns.
Despite the UK economy battling Brexit headwinds and persistent market uncertainty, real estate investment opportunities will remain in 2019. It will require investors to be vigilant, focused, nimble on their feet and creative thinkers, however this will present exciting investment prospects.
