M&G Real Estate: Opportunities for European investors in the UK commercial property market

According to M&G Real Estate’s latest UK Outlook, investment into UK commercial property by a broad range of European investors has been led by purchases in the office sector, particularly in central London.

Despite uncertainty around Brexit, central London office rents have held up well with only minimal decline against a backdrop of record numbers of people in work. Downward pressure over the next 12-24 months could temporarily weaken the central London office market and favour flexible office space providers in the regions, where supply is restricted, and office space is being removed for office-to-residential conversions – a combination likely to be positive for rental growth.

The industrials occupier market shows no signs of slowing and the expansion of logistics and distribution networks, driven by structural change, continues apace. Retailers which are decreasing their physical footprints continue to invest in industrial units. The volume of large-scale speculative development has also been stimulated but is unlikely to satisfy demand for smaller units in London and the South East, which could add to the growing supply/demand mismatch within the sector.

Turning to the retail sector, though some parts of the market are facing weak occupier demand and rental growth, other parts are weathering the current turbulence. Well-located ‘destination’ retail parks and shopping centres with supportive demographics that can benefit from click and collect services. Quality remains a major factor for occupier demand, with prime assets generally holding up better in terms of vacancy.

The private rented sector is a more polarised market and Brexit uncertainties have subdued rents in central London, but the rest of London is proving more resilient. Stronger growth is being seen in the UK’s regions, notably in major urban centres that are less exposed to the outcome of Brexit discussions.

Alternatives such as student accommodation, hotels, healthcare investments are gaining in popularity and importance for their strong long-term growth potential and defensive qualities in the current environment. Like the private rented sector, student accommodation offers long-term growth potential and strong expected rental growth due to supply/demand imbalances, whilst demographic changes are driving rising demand for healthcare.

Commenting, Olivier Vellay, Head of Investment, Continental Europe at M&G Real Estate, says: “Whilst the UK property market has continued its cyclical slowdown in recent months, European investment activity suggests that not only have investors been undeterred by political and economic concerns, but they continue to view the UK as an attractive market with long-term strong fundamentals. As with any period of uncertainty, there are also significant opportunities for those willing to take a long-term view and take on more risk.”