London Property Alliance reports on 2020 market prospects

The State of the Market Seminar held by the London Property Alliance on Friday provided a timely opportunity to reflect on the real estate market in 2019 and to look forward to emerging trends and market performance in 2020.

Bouncing back

2019 was a year of low confidence in the market, ending with a surge of capital investment in Q4 from foreign investors. This resurgence was mainly driven by an “election bounce”, the Conservative majority providing greater certainty and temporary stability for businesses. However, despite the flurry of activity in Q4, overall growth was slow.

London demand remains strong

If 2019 was a year of underperformance, the emerging sentiment for 2020 is one of cautious optimism.

Investment in UK real estate is growing, fuelled by low returns in the bond market and an increase in political certainty. In terms of the commercial office market, Lara Samworth (Knight Frank) believes this increase in optimism is due to a supply shortage driving rental growth. She anticipates that the average price per square foot in London could reach £72.50 in 2020. The continued low supply in the market means it is almost certain that the trend for tenants seeking pre-lets is set to continue throughout the year.

Currently, the biggest sectors for the commercial office market are finance, TMT and flexible working spaces, with the latter dominating take-up in 2019. Increased growth and demand is expected in all three sectors and flexible working is once again anticipated to be the biggest growth area.

However, Andrew Thomas (Colliers) believes that there is still reticence amongst foreign investors, mainly in light of the uncertainty inherent in the Government’s negotiations over the future relationship between the UK and the European Union post-2020. However, he does note that there appears to be an increasing number of international investors seemingly interested in UK real estate, but it remains to be seen whether this interest coverts into additional capital coming into the market.

Key trends for 2020

The speakers identified that the key trends for the London real estate market in 2020 are expected to be: tenant focus on quality rather than price, sustainability in buildings and a focus on wellness. Increasing emphasis on sustainability is expected to drive demand for carbon neutral buildings and many tenants are already demanding that buildings achieve a BREEAM rating of “excellent”.

Landlords have been quick to adapt to these changes in tenant demand, for example, increasing amenity spaces in their buildings to create communal “break out” areas and using reclaimed materials in their fit outs. Claudine Marshall (CBRE) also suggested that landlords have shifted their approach and are being more selective with their tenant choices. An increasing number are insisting on including sustainability clauses in their leases, ensuring that tenants are not associated with unsustainable and irresponsible practices.

In the retail sector, landlords are increasingly shifting their focus to creating an experience for customers. High street presence is still perceived as important to build brand loyalty and to increase customer awareness. Claudine is expecting to see an increase in the number of flagship stores and experience stores on the high street, building on the success of the likes of Apple, Dyson and Samsung.

What’s next for the real estate market?

Despite the prospect of real growth in the market in 2020 and some positive trends emerging from office tenants, the continued political and economic uncertainty means that the panellists moderated the enthusiasm of their predictions.

The message was clear: 2020 is set to be a year of cautious optimism in the real estate market, with some growth expected, tempered by careful management of the potential impact of the Brexit negotiations.