When we prepared our cross sector outlook last year, few would have forecast that 12 months later the UK would have voted to leave the EU – prompting a change in leadership of the country – and that Donald Trump would have become president-elect in the US.
Though not nearly on the scale of the global financial crisis, these events have heralded much greater domestic uncertainty on both political and economic fronts.
Underlying drivers
At a macro level this means more caution and risk aversion among investors. This is expected to reduce the prospects for capital growth across all three sectors.
It means more secure income streams will become more highly prized among core investors. This plays towards the UK long commercial leases where the rental covenant is strongest. For the same reason we expect the momentum for investment into large residential portfolios to continue to grow among institutions.
Risk premiums are likely to increase. This is likely to push commercial yields out slightly in the short term, presenting investment opportunities, particularly given the low returns available from sovereign bonds and cash.
The changed attitude to risk is likely to mean a less crowded market place for the value-add investor, particularly if lender caution results in tighter borrowing criteria in the development sector. Greater risk will mean a strong focus on sectors where the fundamentals of supply and demand are most insulated such as retirement housing, logistics and energy.
For opportunistic investors the continuation of the ultra low interest rate environment is likely to limit the extent to which distressed assets hit the market. This is likely to mean they look instead to the development markets, particularly mixed use opportunities linked to infrastructure improvements.
Against this overarching picture, there are a number of sector specific factors, that will influence the pattern of investment in the run up to and immediate aftermath of Brexit.