According to M&G Real Estate, parts of the UK commercial property market will remain strong despite the uncertainty surrounding ongoing Brexit negotiations with the UK economy softening only modestly and unemployment at its lowest in 42 years.
Bright rental outlook for industrials
M&G Real Estate’s UK Outlook research suggests that the industrial and logistics sector will continue to experience strong rental growth due to the limited availability and high demand for industrial space. This trend is accelerated by the ongoing shift to e-commerce with retailers such as Amazon, Lidl and Aldi increasing their supply chains to fulfil demand for quick deliveries. Available stock is being squeezed even further as urban distribution centres are being snapped up to cater for this demand but the sector is responding innovatively with the introduction of multi-storey assets, subterranean logistic units and mixed use space such as ‘beds and sheds’ which amalgamate residential and industrial space under one roof.
Regional offices remain strong while Central London offices challenged
M&G Real Estate predicts that office space in the regions could experience rental growth of 10 percent in the next five years as a result of the lack of Grade ‘A’ office space, infrastructure projects such as HS2, and the regeneration of city centres. Central London offices remain challenged due to the downside risks from Brexit negotiations with some financial institutions announcing plans to cut or relocate London-based staff. However, the city’s job market is becoming increasingly diversified with a growing presence of operators offering innovative office space, creating long-term opportunities for landlords.
Residential Private Rented Sector benefiting from heightened uncertainty
The Private Rented Sector (PRS) is proving its value as a defensive asset class and is benefiting from heightened uncertainty. With rock bottom interest rates, limited supply and ongoing demand, house prices will remain unaffordable for many, prompting people to rent for longer. With a substantial development pipeline contributing to new space, M&G Real Estate’s rental projections for the central London PRS market remain negative, but predicts a continued rise in rental growth outside of Central London.
Richard Gwilliam, Head of Property Research, M&G Real Estate comments: “While there are clear risks related to the uncertain political backdrop, we need to be ready to capitalise on the opportunities that will emerge. We believe that ongoing risk aversion and yield expansion for non-core stock creates opportunities. Non-core assets, with a need for refurbishment or repositioning, vacancies or short leases, can provide heathy investment returns if properly managed.
“Significant investor interest in the UK market is likely to continue given its status as a liquid and highly transparent market supported by a well-established and respected legal system.”