UK real estate expected to gain momentum in 2020 though political uncertainty will persist

Miller Mathieson, executive director in CBRE Scotland

The real estate sector should gain momentum in 2020 after a Brexit withdrawal agreement is reached, according to CBRE’s UK Real Estate Market Outlook 2020.

CBRE forecasts that the UK economy will have a slow start to 2020, before picking up in Q2. It forecasts continued real earnings growth, due to record labour participation and unemployment below 4%.

With the low interest rate environment set to continue, CBRE anticipates UK real estate will offer attractive and solid returns for investors. Across all property, CBRE expects total returns of 4% per annum between 2020 to 2024. Investment volumes should rebound sharply if a Brexit withdrawal agreement is achieved, as now seems very likely.

Several sectors are predicted to outperform across the UK and generate new opportunities for investors and occupiers. After exceeding expectations in 2019, office occupier markets are likely to continue to perform well across the UK next year, with corporate occupiers increasingly using real estate as part of their recruitment and retention strategy. Office-based employment, which has grown rapidly over the past two years, is set to continue to expand in 2020, albeit at a more moderate rate. The war for talent will drive the occupational markets, with increasing demand for new, high-quality space. Given the supply of such space remains low, further rental growth is predicted in 2020.

The industrials and logistics sector is set to remain resilient, on the back of steady demand for logistics space and the sustained growth of e-commerce. Industrials and logistics rents are expected to continue to outperform other sectors. Next year could also see the first multifamily assets trade hands in the UK, rather than the high volume of forward-funding transactions seen in the market up until now. With developments set to spread throughout the UK, CBRE predicts investment in multifamily will increase by 30% in 2020.

In the retail sector, CBRE expects a continuation of the current challenging environment from a combination of structural (changing consumer spending preferences and the growth of e-commerce) and cyclical (wage growth above inflation and EU workforce shortages) factors. However, CBRE expects retailers who redevelop and reposition excess retail space for alternative uses to survive and thrive in 2020. Health and beauty will continue to benefit from increasing consumer interest in wellbeing, while the food and grocery sector will perform well as convenience remains the top driver for consumers.

Operational real estate, including student accommodation, healthcare, leisure, hotels and petroleum and automotive, is set to be a major growth area in 2020, with an increasing volume of deals in the sector and the emergence of specialist and core funds, with a greater allocation of institutional capital into operational real estate. Drivers include the continued slowing of the traditional real estate sectors, the shift in focus to non-core markets as balancing real estate capital in core markets remains challenging, and the decline in lease lengths and capital growth through rent reviews. CBRE expects the trend of the ‘hotelification’ of real estate to continue in 2020, as property investors align with best-in-class operating partners to drive volume and pricing.

Climate change will continue to rise up the agenda for real estate investors and developers. It will be particularly relevant for Scotland with the UN holding a major climate change summit in Glasgow in November 2020. As a result of increasing social, political and regulatory pressures, CBRE predicts that carbon neutrality will become an explicit goal for real estate decision-makers in 2020. The real estate industry will move towards a more holistic approach to tackling climate change, with the environmental impact of every stage of a building’s life cycle considered – ranging from the sourcing of raw materials to redevelopment. With increasing activism amongst shareholders and clients, CBRE expects most real estate investment strategies to incorporate carbon neutrality during the next year.

Miller Mathieson, Managing Director Scotland, CBRE, said: “While political uncertainty will persist throughout 2020 as we negotiate our future trade relationship with the EU, we expect to see a rebound in investment volumes across Scotland and the rest of the UK. The underlying property fundamentals in Scotland’s biggest cities remain strong especially across the office, industrial and operational real estate sectors. Climate change is now a major focus of the property industry and there is no doubt that investors, developers and occupiers will prioritise this issue in 2020 and beyond.”