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April 7, 2015

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Capital value growth of property in UK forecast to rise at slower pace

Strong capital-value growth was undoubtedly the key theme of 2014, with growth across all sectors stronger than we were forecasting at the beginning of the year. We expect to see a continued rise across all prime sectors in 2015, albeit at a slower rate.

The UK general election in May will definitely have some effect on sentiment, though in the agricultural and commercial sectors we expect the effects to be relatively muted. In residential markets, the threat of a mansion tax combined with the Mortgage Market Review could lead to a more sustained hiatus in capital value growth in 2015.

Generally, we expect the macroeconomic story for the UK will remain benign, with base rates remaining unchanged until early 2016 and a combination of low oil prices and recovering incomes giving a boost to the UK consumer.

The high returns of all property sectors will continue to attract attention, and we expect real estate to continue to deliver high returns, compared with other asset classes. This will mean that domestic and international demand for prime and good secondary assets will be strong, though we expect to see more focus on supply and demand fundamentals in 2015, rather than just the potential for yield shift.

Our top picks are for market sectors with structural or pending undersupply. We also expect to see more investors looking to the next stages of the recovery and at which markets and regions will benefit from the next ripple of economic growth away from the south of the country.

Investors looking for the highest returns will continue to look for development opportunities. We particularly favor outer London and key regional cities. Speculative development activity will remain sparse, due to investor and lender caution, but those who are brave enough to undertake it will do well.

Overall, we expect that 2015 will be another strong year for UK real estate, but investors are going to have to work harder to identify markets and sectors that will deliver high returns.

Commercial view

The commercial markets in 2015 will still offer opportunities for both risk-averse and risk-embracing investors, though the stronger-than-expected bounce in capital values in 2014 will diminish.

In London offices, the low level of availability will continue to deliver strong rental growth. We expect to see continuing strong demand from risk-averse international investors for the best quality stock, with the City of London still looking comparatively cheap, as are some edge-of-core West End sub-markets that are still starved of newly built office stock.

Regional office markets are still very early in the cycle, and this will continue to drive steady growth in investor interest. Last year had the largest proportion of asset purchases outside London since 2006, and we expect this trend to continue.

In the retail markets, we expect warehousing to perform well due to its Internet-friendly nature, and strong high streets and dominant shopping centers also will start to out-perform.

We continue to favor logistics hubs in the center of the country and around the M25, as well as local multi-let estates close to affluent suburbs.

Residential outlook

 

Returns will be less driven by a yield shift in 2015, with the best performance coming from an understanding of where local markets and sectors are in the rental cycle.

Following a year of strong mainstream house-price growth in 2014 that ran well ahead of the economic recovery, we expect much more subdued growth in 2015. This is particularly the case in London, which has now outperformed the rest of the UK for over nine years and where affordability is likely to look increasingly stretched as interest rates rise.

In addition, the Mortgage Market Review is likely to restrict the amount that people are able to borrow. In turn, this is likely to restrict mortgaged buyers’ ability to get on or trade up the housing ladder, thereby continuing to drive demand into the private rental sector and underpinning rental growth.

The ongoing debate around the taxation of high value property is likely to mean a relatively muted prime market in the run-up to the election. While the mainstream market may receive a one-off fillip from the stamp duty changes in the 2014 Autumn Statement, prime markets that are bearing an increased tax burden will also have to contend with political rhetoric regarding a potential mansion tax, even though the medium-term prospects remain positive.




 

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