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Q4 Market Overview

19 December 2018

A Winter’s Tale

 

First there was to be a vote, then not, then a motion of no-confidence was tabled, then lost, all within a week! One would have expected this Shakespearean farce being played out at the Palace of Westminster to have spooked the markets more. There’s been a small drop in Sterling and the FTSE 100 has tucked under 7000; so, have all these uncertainties been priced in already?

The UK economy trundles on with the ONS stating Q3 GDP growth was at 0.4%, down a little on the previous quarter of 0.6%. Unemployment remains at historically low levels at 4.1%, helping with greater tax receipts and allowing the Chancellor to declare at the last Budget the ‘end of austerity’. The low value of Sterling has delivered a welcome boost to exporting manufacturers but increased the cost of imports. This has pushed inflation above the Bank of England’s target of 2%, resulting in the MPC raising the base rate to 0.75% in August 2018.

However, signs of dwindling consumer confidence, the patchy Christmas retail sales already declared by some of the bigger (high street) operators, together with growing concerns over a no deal Brexit scenario and therefore holding back corporate decision making, is likely to pull down GDP performance in Q4.

 

UK Property

The commercial property market continues to perform well, with Q3 Year-to-Date returns at 5.2%, largely driven by rental rather than capital growth. Total investment volumes in Q3 reached £14.8bn, with the total for the year predicted to be around £55bn, down from the £65bn in 2017. Overseas investors are driving this level of investment into the UK, with £3.5bn of net investment in Q3 compared to a limited impetus from UK institutions at £984m. With the fall in the value of Sterling, UK property looks set to remain increasingly attractive to foreign currency.

Total UK Commercial Property Investment – Bn’s

Source: Property Archive

 

Investors by Type – Bn’s

Source: Property Archive

Although there is consensus that bond yields may rise next year, which historically puts pressure on property yields to move out, there is still sufficient scope for a tightening of the arbitrage between bond rates and property yields, whilst still maintaining a ‘liquidity premium’ for bonds.

 

Source: Economic Briefing with Roger Bootle November 2018

Total returns for property are projected to remain stable over the next year. Retail Property remains the challenge for both High Street and Shopping Centres, as consumer confidence remains subdued and structural changes within the way we shop, driving very limited rental growth in almost all locations. As a result, this sector is failing to attract interest from investors.

Industrial remains the most positive in terms of rental growth prospects which in turn is attracting high levels of investment; 2018 looks to be the second strongest year in terms of industrial investment volumes since 2000. IPF are predicting a total return on industrial of 7.1% next year (see below).

Source: IPF, Summer 2018

 

Summary

A challenging year ahead for the UK property market, where income and the ability to enhance value will be paramount to investors. For those like Barwood Capital, with an in depth understanding of their regional markets and the factors affecting them, there will be an opportunity to create value through targeted investment in trends created by new technology, infrastructure and demographics, as well as the changing occupier base.

Whether we come out of Europe, stay in or have a foot in each camp, the long term structural changes within the property landscape that sit before us, give rise to opportunities for those with the forethought and the agility to adapt and create.

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