It wasn’t easy to chart a path for UK commercial property in 2019, but that wasn’t just down to Brexit: wider macro-economic world events, structural change and where we’re at in the property cycle all played their part.   

While some measures of business uncertainty were volatile, UK consumer confidence was up, unemployment levels at record lows, and one way or another (excluding retail) overall we saw very little distress in the market in 2019.

Looking ahead to this year though we think that some non-domestic institutional investors will re-enter the UK market cautiously now the path towards Brexit is relatively clear. These funds, predominantly European and Japanese, have considerable amounts to invest and an increasing bias towards property due to low base rates at home. The bulk of this money is likely to focus on larger, secure-income assets in London, logistics and a handful of prime regional city offices.

While yields on these asset types are historically low, they’re high relative to other global markets, which will be enough to convince some investors to increase their UK weightings. There’s also an argument that for once London is following the occupational cycle, enabling investors to justify paying cyclically low yields for another few years.

The challenge is finding stock to invest in. Development activity in the office market is close to record low levels and, unlike previous periods of uncertainty, there’s been very limited distressed selling, with many investors opting to refinance rather than sell.

If the traditional property lifecycle of build, let, sell has been damaged by the GFC and Brexit, then the obvious strategy for the early 2020s is to consider speculative office development. None of the UK’s top nine office markets has more than 1.5 years of Grade A supply at average annual levels of take-up, while pre-letting remains strong and lease events and requirements abover average. Office development starts will rise this year but won’t be enough to satisfy demand. Developers’ margins will be challenged by rising site prices, construction costs and the cost/availability of development finance.

The prevailing wisdom of the last few years was that selling retail while buying logistics should be at the core of every investor’s strategy. However, it isn’t quite so simple: the returns from tactical buying of retail could exceed those from paying record low yields for hot logistics property. While there’s nothing wrong with buying good logistics, alongside record low yields the sector faces its own structural challenges including staff availability, autonomous trucks and competition for land from housebuilders.

Retail property is undoubtedly a tough place to be in at the moment, but this year we should see some investors capitalise on the 100+ basis point falls in prime yields in the last two years. Retail isn’t dead, and even in the UK where online shopping has penetrated further than most other countries, over 80 per cent of everything we buy touches a shop in some way.

With capital values on prime retail schemes having fallen by 20 per cent or more in the last two years the fact that investors are beginning to call the bottom of the cycle by taking a large position in UK retail, attracted by price corrections big enough to allow rents to rebalance to levels acceptable to struggling retailers, is not surprising. This could end the stalemate between vendors and purchasers of retail on pricing.

Not all retail is a buy, but shoppers will continue to want to engage in prime retail: this could be anything from an uber-experiential mall to a humble neighbourhood centre, so long as it fits its catchment.

So, overall while the last few years have demonstrated that commercial property is pretty good at shrugging off political uncertainty, recent trends suggest that structural changes will continue to be an opportunity beyond just 2019.

Further information

Contact Mat Oakley

Read more: The uncertainty isn't over: but don't be afraid of it