Commercial Property News January 2020 Compiled by Hayven Property Tax
Commercial property is always a very newsworthy topic. Here is a roundup of the latest news (January 2020) concerning commercial property and investments in the UK, including the forecasts for commercial properties in the new year.
Real estate outlook 2020: The year UK real estate rebounds?
With a new Conservative government enjoying a majority in parliament and the passing of Brexit withdrawal bill, all eyes are on what will happen to the UK real estate market in 2020, reports “IPE Real Assets”
Expectations are for a departure from the EU at the end of January. Will this finally spring the country’s commercial property back to life?
According to Will Matthews at Knight Frank, business is always looking for certainty and the conservative majority in the general election will create a more certain environment, with the UK more likely to leave the EU early next year.
“We might then witness a flurry of activity at the start of the year, as there is a great deal of pent up demand for commercial real estate that just needs a bit of certainty to be realised, Matthews who heads the head of UK commercial research says.
This is contingent on the right assets being available, and investors seeing the value in them. It will also rest on investors being willing to sell – ultimately a ‘Catch 22’ scenario, he says.
Matthews adds that investors might be reluctant to sell as there is nowhere to put their money in the aftermath, and subsequently there may be fewer assets up for sale.
“We’re yet to see the anticipated large scale relocation of major companies to other parts of Europe materialise.”
US private equity funds are the currently the largest source of capital, though not all of them are squarely focused on the UK, Matthews says.
“The main trend we’re seeing now is the sheer diversity of sources, with investors more willing to go for different asset classes, whereas in the past some asset classes were more institutional in nature.
“The Middle East is likely to be a short-term source, whilst China’s renewed government policy will set it up for growth in the longer term. Similarly, Japan is gearing up for a great deal of investment activity in 2020.
Matthews believes London will be the next big opportunity. The “market peaked in 2015” and has been in a holding pattern ever since he says.
“There are already signs of investor confidence in the city; more than 300,000 jobs have been created over the past four to five years, and we estimate a total of £55bn (€65m) is waiting in the wings as unspent financial firepower.
”That figure has doubled since 2016, and investors will no doubt be watching it in 2020 with a renewed eagerness.”
Jessica Berney, the fund manager of the Schroder Real Estate Fund (SREF), says Schroders expects the commercial real estate market in the UK to remain strong in 2020, despite some investor and occupier hesitancy as a result of Brexit and the slowdown in economic activity.
Berney says a “potential Brexit deal could trigger a new inflow of foreign capital, particularly into the London office market, where yields remain higher than Paris and Berlin.
“Meanwhile the weakness of sterling may also attract investors from the likes of South Korea, Japan and the Middle East in particular.”
Another ‘tricky year’ for retail
Berney says Schroder is seeing the demand for lightweight industrial space growing and, aligned with this, self-storage is increasing in popularity.
“Initially this growth was in line with demographic trends, where demand is being driven by changing occupancy patterns,” she says. “However, we are also seeing increased demand from the online-seller market for self-storage space, where this flexible storage solution is being used to grow businesses without having to commit to large storage options.
“Demand for high-quality and flexible-office space continues apace, and we don’t anticipate this changing during 2020.”
Chris Taylor, the head of private markets at Hermes Investment Management, continues to remain cautious about the level of real estate pricing in “absolute terms – given the continued profound structural changes affecting the fundamentals of occupational demand”.
He adds: ”For many investors, of course, the positive yield gap between real estate and bonds continues to support the investment case for relative value, which has arguably created a real-assets bubble.
“However, we are already witnessing outward yield movement across the retail sector as the underlying occupiers continue to face fixed overheads with no real-wage inflation to support sales growth and further leakage of sales online; technology, urbanisation, demographic lifestyle trends and an increasing awareness of climate and environmental risks are all affecting how occupiers behave across all sectors of the real estate market.”
Taylor expects to see “further capital declines across the retail sector in particular, as much of the existing space is no longer relevant”, and argues that “those managers which address the fundamental drivers of income and have integrated ESG within their analysis should outperform”.
Similarly, Berney says retail may have another tricky year, but retail centres can “still thrive if the right investment opportunities are targeted”, she says – particularly those that benefit from structural growth drivers, such as rapid urbanisation, technology and demographics.
Greg Kane, head of European investment research at PGIM Real Estate, says that, despite ongoing concerns about the outlook for global economic growth and weakness in cross-border capital flows, the performance of the global real estate market in 2020 is set to be supported by a number of important factors.
“The demand side continues to enjoy support from employment growth, which is coming up against still-low supply growth,” he says. “Meanwhile, a reversal of course among major central banks towards looser monetary policy and lower interest rates are set to result in further yield compression.
“In absence of a more pronounced economic downturn, real estate markets look set to deliver another year of decent, if not spectacular, returns in 2020. However, as always, real estate dynamics vary quite significantly by geography.”
Central banks give European real estate an extended stay
Looking at Europe more broadly, a report by AEW shows that, despite worsening global economic growth and business confidence, the outlook for European property has improved.
The report states that, as “political uncertainty dominates global news headlines, business confidence and economic growth appear to be trending down”, but central banks’ policies are expected to keep rates lower for longer.
These lower for longer yields are “good news for commercial property values with AEW’s latest risk-adjusted return approach identifying 80 of the 100 covered markets as attractive or neutral”.
AEW says this benign overall outlook allows for a renewed focus on adoption of ESG processes and reporting procedures, as the traditional cyclical risks of excessive new supply and use of debt remain low.
Rob Wilkinson, the European CEO of AEW, says: “After the recent central bank policy reversals, the lower-for-longer scenario has now become our base and, perhaps counter-intuitively, this can mean good news for real estate investors.
“With bond and property yields expected to remain at current levels for some time to come, strong competition for deals will continue. For those with an intimate on-the-ground knowledge of specific markets, value can still very much be found, often in places that might seem out of favour, although stock selection remains crucial.”
Hans Vrensen, head of research and strategy at AEW in Europe, adds that, as the European property market cycle is extended, the sector can focus on adopting the latest best practice ESG processes and reporting procedures, especially on the building level.
“This is consistent with our positive market outlook, as the usual cyclical risks of excessive new supply of space and use of debt are now less of a concern. We could call it the calm before the storm – with no clouds on the horizon yet.”
ESG and impact investment are sure to have an even greater significance across real estate in 2020, Berney adds.
“Occupiers are a lot more aware of climate change and as such we have already seen an increase in demand for space with good sustainability credentials, and health and wellbeing considerations at the core.
“These aspects – from acquisition through to asset management – have never been more relevant in ensuring that our tenants have the best experience possible and that our buildings are fit for purpose for years to come.”
Savills’ share price jumps after decisive Tory election boosts Britain’s expensive homes and commercial property markets
Savills has seen shares jump after announcing that the UK commercial and residential markets picked up after last month’s general election, reports “This is Money”.
The real estate business said its full-year results for 2019 will be at the ‘upper end’ of expectations, following an ‘excellent’ performance in the UK.
Savills said that Brexit uncertainty had restrained UK growth until mid-December, but saw ‘a strong close to the year as the confidence to transact returned to the market’.
Shares in the company increased by 7.1 per cent to 1,231p in early trading on Monday.
The London-listed firm also said it was particularly ‘resilient’ as it faced challenging backdrops in both the UK and Hong Kong.
Savills said: ‘Despite the backdrop of uncertainty, the UK performed well across all business lines, latterly benefiting from improved investor sentiment in both commercial and residential markets.
‘Our residential business continued to outperform the overall market conditions, in particular taking share in the core London market.’
Savills said it believes increased political stability in the UK means it ‘should maintain improved sentiment’, but said it remains cautious until the full impact of Brexit is better understood.
First Investment Made By New £55 Million Commercial Property Fund
Work on the third phase of Glan yr Afon Industrial Estate in Aberystwyth has begun with confirmation of a commercial property loan for developers Ellis Development Company (Wales) Ltd by the Development Bank of Wales.
Speaking on Monday 13 January 2020, Ken Skates, Minister for Economy and Transport welcomed the first investment from the £55 million Wales Commercial Property Fund managed by the Development Bank of Wales, reports “Wales 247”.
Launched last year to encourage SME developers to invest in Wales’ commercial property market, the fund is financed by the Welsh Government. Loans from £250,000 to £5 million are available with a maximum five-year term for mixed-use and commercial development projects in Wales.
Aberystwyth based Ellis Development secured the loan to support the development of blocks five and six at Parc Melin, the third phase of the Glan yr Afon Industrial Estate in Aberystwyth. 12 units totalling 16,910 sq ft of speculative light industrial and commercial space will add to the existing 17 units; all of which have been sold or let with tenants including Greggs and Tool Station.
Ken Skates, Minister for Economy and Transport, said: “The Welsh Government’s Economic Action Plan recognises that businesses of all sizes across Wales need modern sites and premises that will enable them to expand and grow. The £55 million Wales Commercial Property Fund is key to delivering that and is already encouraging smaller developers to invest in communities.
“The aim of the fund is to support the development of over 400,000 sq ft of much needed industrial and commercial space across Wales as part of a wider property delivery plan over the next ten years to deliver against the ambitions set out in our Economic Action Plan. The Glan yr Afon development will provide a boost to the economic outlook of Mid Wales and is an excellent example of the public and private sector working in partnership for the benefit of local people and the economy.”
Meirion Ellis-Jones, Director of Ellis Development said: “Aberystwyth is the administrative and commercial centre for Mid Wales. The Glan yr Afon development is the main trading estate in the area with a mix of modern, light industrial and warehouse occupiers and office users.
“The tailored and flexible funding from the Development Bank of Wales has enabled us to fully develop this site having successfully filled the first two phases. We have already made good progress on this speculative development and there will be an additional 12 units available to purchase or rent later in 2020.”
Cenydd Rowlands, Property Director for the Development Bank of Wales added: “The Wales Commercial Property Fund is designed to help unlock commercial developments at a local level throughout Wales. The nature of the short-term flexible funding is ideal for smaller developers who are looking to progress speculative developments.
“The support for Meirion Ellis-Jones in Aberystwyth is a great example of the funding that we can provide for smaller developers at a local level; encouraging local business and stimulating economic growth wherever possible.”
Why experts are predicting confidence to return to the commercial property market in 2020
Confidence is expected to return to the commercial property market this year following a decisive election result as developers and investors “crack on” with projects they were previously hesitant about, reports “The Yorkshire Evening Post”.
Despite ongoing Brexit talks, Yorkshire property experts expect a productive year in both the office and investment markets as businesses press ahead with expansion or relocation plans.
Eamon Fox, partner and head of office agency at the Leeds office of property agent Knight Frank, predicts top office rents will reach £34 per sq ft in the city by the end of the year from a current headline figure of £30 per sq ft.
“Despite the ongoing Brexit talks, we are still seeing many businesses pressing ahead with expansion or relocation plans,” he said. “This is against a backdrop of a severe lack of options and an office development pipeline that continues to be raided by early movers, which is why we are forecasting continued rent rises over the next three years.
“It is also relevant to note that Prime Minister Boris Johnson is planning a big shift of civil servants out of London this year as part of his aim of “levelling up” opportunity and spreading wealth across the country. This could have major consequences for Leeds.”
Richard Heslop, owner and managing director of DE Commercial, added: “I expect a bounce within the commercial property sector in Yorkshire next year. The debate over Brexit and the threat of punitive taxation under a potential Labour government was holding everyone back – now developers and investors are ready to crack on with projects in the region.”
Although there is a huge development pipeline across Leeds, Claire Paraskeva, head of the Leeds Office of Avison Young believes the supply of new office space may not be able to keep up with demand as there is no speculative buildings currently under construction, coupled with an ‘acute shortage’ of readily available new space.
“Leeds will continue to provide significant opportunities for developers and investors in 2020 as the exodus from London continues, and those in the refurbishment market will thrive,” she added.
Meanwhile, 2020 is predicted to be another strong year in the region’s logistics and distribution sector.
James Scott, development director of Muse Developments in Leeds, said: “A number of recently announced large speculative deals are moving forward, which will likely alter the dynamic of the big-box market.
“Generally, it is considered that the market will start to improve, albeit cautiously, as we move into 2020. The election result has removed a degree of uncertainty and this should see investors re-engaging, increasingly as a more orderly Brexit route becomes clearer.”
Simon Dove, a partner with Leeds-based property consultancy Dove Haigh Philipps, added: “Industrial land values for prime sites are strong and will continue to rise throughout the region, albeit at a lesser rate.
“Industrial design and build deals and speculative builds throughout the region will continue, supported by a lack of supply.”
A renewed emphasis on rebalancing the geo-economy and increased investment to the Northern Powerhouse, including Northern Power House Rail, are predicted by Keith Hardman, head of Cushman & Wakefield’s Leeds office.
Meanwhile, David Armitage, chairman of independent brickmaker, York Handmade Brick, said businesses could now plan ahead, adding: “We are now investing over £1m in brand-new, state-of-the-art machinery, which will speed up productivity and increase profitability.”
About Hayven Property Tax:
Hayven Property Tax is an independent commercial property tax consulting company specialising in capital allowance claims for commercial properties.
Based in Cardiff, Hayven Property Tax are able to service clients across the United Kingdom.