St Bride’s Managers annual seminar was as illuminating and unmissable as ever. It provided a much needed overview of an uncertain UK real estate market and even more unpredictable geopolitical and economic landscape that investors now have to navigate.
The initial snapshot of the real estate market was not immediately encouraging. UK investment volumes in Q1 2019 were the lowest since Q3 2016. There were only 19 deals in Q1 in excess of £100m in value. Office investors found the first quarter of Q1 2019 particularly challenging with investment in that sector having slumped by 60% to a 10 year low. The largest shopping centre transaction in Q1 2019 was the Nicholson Shopping Centre in Maidenhead, which sold at a comparatively modest price tag of just £25 million.
Looking at the regions, only investment volumes in Yorkshire and the East of the country exceeded their five year averages. If you exclude regional offices, where yields have hardened from 5% (September 2018) to 4.75% (June 2019), only the alternative sectors have seen increases in capital value, with yields for student accommodation and care homes coming in from 4.5% to 3.5% and from 4% to 3.75% respectively over the same period.
However, all is not lost. Robert Houston of St Bride’s retains a sense of optimism with his predictions for 2019. While he acknowledges that the woes of the High Street are far from over, he predicts that industrial assets will continue to deliver outperformance, institutional investors will continue to ramp up investment in BTR and he believes there will be modest rental growth for regional offices. Houston highlighted that the London office sector continues to defy negative expectations, no doubt linked in part to the city’s consistent position at the top of the St. Bride’s World City Index. On the wider economic front St. Bride’s expect GDP will remain above 1.2% and interest rates will stay low at 0.75%.
No one can deny that further uncertainty over the forthcoming months will continue to be challenging for the UK market however it seems reasonable to surmise that while there are potential threats to the real estate sector there are also clear opportunities. The overall macro-economic picture in the UK remains (perhaps surprisingly) robust and lenders continue to commit significant funds to the real estate debt market unabated. Houston was confident enough to restate his All Property Total Returns prediction of 3.75% for the year, somewhat ahead of the contrastingly pessimistic 1.8% on offer in the IPF Consensus Forecast. The second half of 2019 could well leave investors pleasantly surprised.