Real estate investors are likely to focus on the fundamentals of supply and demand in the UK market in order to secure income streams, according to new data from Savills.
Investors will place greater reliance on rental growth to deliver capital appreciation, to reflect the uncertainty surrounding the UK’s economic and political environment, according to Savills.
Capital growth is expected to account for just 30 per cent of total returns across all UK property from 2019 to 2023, according to Savills’s recent predictions. This is down from the 2018 forecast of 40 per cent and is well below the average 55 per cent share over the past decade.
This is based on the assumption that the UK leaves the EU, and that uncertainty will remain in the market in the medium-term, with interest rates rising gradually up to 2023, according to Savills.
New London office development opportunities coming to the market in the next 12 months could be a wise move for investors, due to the potential under supply of this property type beyond 2021, according to Savills. It also highlights other attractive opportunities recorded in its Savills league table forecasting the average annualised returns for various property sectors from 2019 to 2023.
Whereas in the residential sector, Savills expects a continued squeeze on the buy to let mortgage market, with cash-rich private investors continuing to shift their focus to markets in the Midlands and the North in search of higher yields and the better capital growth prospects that exist at this point in the housing market cycle.
Momentum in the Build to Rent sector is set to increase more widely across the country as policymakers, planners and developers grow more familiar with the sector and combine with growing recognition from investors of the ability to deliver competitive income returns by operating at scale.
The political desire to substantially increase house building across a wider range of types and tenures is forecast to present more opportunities to bring forward residential development land through the planning system, underpinning values across a range of asset classes, according to Savills.
Small and medium-sized sites are expected to best placed to tap in to demand an increasingly diverse range of developers, as they are less dominated by the major house builders.
Businesses that can be diversified and future-proofed offer value in the rural sector according to Savills. As such, estates in south east England offer the greatest opportunity for income returns, due to the potential to diversify into a greater number of residential and commercial uses than those in other parts of the UK.
Good-quality land and certain livestock enterprises, where productivity is strong and aligned with market demand, should also be resilient to the evolving policy and trade environment and therefore be an attractive pick, says Savills.
James Sparrow, CEO Savills UK and Europe, says: “As they navigate an era of widespread uncertainty, real estate investors need to focus more on the long-term drivers of investment success to produce income return while capital growth treads water, rather than reacting to short-term trends.
“The dominant priority is delivering well-being in the quality and design of all property classes, as meeting customer expectations is essential in generating secure trading or rental income.
“Secondly, but crucial in the long-term, is the environmental agenda. Driven by regulatory changes, we predict that ‘net environmental gain’ and offsetting will be the buzzwords in rural land use and planning development in 2019.”