CoStar Column: Investing in property in 2018

By Manish Chande - Friday, January 12, 2018 9:13

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2017 reports on commercial property were often peppered with Brexit concerns. Uncertainty in the Brexit environment was persistently blamed for affecting the UK property market. But while Brexit is not going away neither are the UK's strong fundamentals writes Manish Chande, senior partner at Clearbell, in an exclusive look at the year ahead for CoStar News.

It was not all doom and gloom for UK property in 2017. Foreign investors continued to dominate the market, with many shrugging off the lower risks associated with Brexit compared to their own markets and embracing UK property’s strong fundamentals.

Brexit uncertainty will remain part of the narrative for commercial this year. But it should not be the whole story.

Going into 2018 we see investment opportunities both in London and the UK regions, across sectors.

London’s “reverse ripple effect” will make the City ripe for investment

Whilst the short-term impact of Brexit uncertainty cannot be overlooked, our view is that this will create an investment opportunity in London this year.

Concerns about a disorderly transition period may have diminished, but the London property market is expected to lag behind other UK regions in 2018, acting very much as its own microclimate. Buyer uncertainty is likely to be compounded further after the Bank of England signalled that interest rates may rise further this year.

For us, this presents an opportunity.

In previous years we’ve talked about a ripple effect from London. London was overpriced whilst many regional UK cities were experiencing growth, benefiting from companies moving functions out of London to save costs.

This year we may see this trend reverse, with property prices in outer boroughs rising faster than in central London. This could create a window for opportunistic investors to take advantage of and acquire sites in the City at a discounted rate. Indeed, we are already seeing some City assets, which failed to trade towards the end of last year, now being offered at discounts to their original asking prices.

Regardless of your opinion on the outlook for London in 2018, the capital is set to remain one of the liveliest commercial property markets in the world in the coming years.

The battle of the regions hots up

London investment this year may feel more opportunistic due to a slightly subdued outlook for growth, but we expect other major UK regional cities to pick up the slack in growth.

As part of the Government’s Industrial Strategy, Theresa May has outlined her intention to invest an additional £2 billion a year into R&D as well as a further £1.1 billion of funding for local roads and public transport. We expect this commitment to UK wide investment to continue to support regional real estate.

Birmingham has already benefitted from major redevelopment to the city centre and is set to reap the rewards of investment in infrastructure projects such as HS2. The continued revitalisation of Birmingham is also set to accelerate the flight of major organisations, such as HSBC, from London.

Looking to the South West, it’s quite possible that 2018 will be the year that Bristol follows a similar pattern to Birmingham and Manchester, who have benefited from business tenants moving out of London. Businesses will soon need to consider other regions where suitable office space remains in greater supply.

The chronic shortage of grade A supply is set to impact a number of key regional markets, including both Edinburgh and Glasgow. At the same time, tenants are increasingly demanding shorter terms and flexibility in their leases. With co-working having exploded in London over the past eighteen months, 2018 could also see co-working arriving in regions beyond the M25.

Industrial will continue to attract interest

Another area where the demand supply imbalance will present opportunities this year is industrial.

2018 will be the year that the UK must confront the shortage of warehouses driven by under-development and growing demand for e-commerce. While supply lacks, there are investment opportunities to develop logistics sites in prime delivery locations across the UK and generate good cash-on-cash returns.

Whilst Brexit is of course one to watch, it is not the only factor to consider. There remain plenty of opportunities in both London and beyond in 2018. Rather than viewing Brexit as a barrier to entry, the shrewdest investors will use this to their advantage and capitalise on relatively low prices in prime locations.

Manish Chande is Senior Partner at Clearbell

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