Lingering uncertainty has been a core theme of 2017, as the UK begins the transition out of the EU. Negotiations may be underway, but the market has yet to gain the level of clarity desired by many investors. Instead, risk aversion has become the overriding theme.

This has translated into resilient demand for prime assets and secure income streams, whether that be central London office space, large tracts of productive agricultural land, or institutionally backed build to rent residential developments.

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Outlook and opportunities

We expect more of the same over the next five years, with long-life income streams becoming ever more highly prized. Indeed, income returns account for just over 60% of our projected total returns from property assets during the next five years. This is reflected by our muted capital-growth forecasts at this stage in the cycle, not least because we expect the cost of capital to increase over the next five years.

Consequently, in the commercial property market there seems much less room for yield compression than the recent past. In the residential sector, mandatory stress tests will constrain the amount of debt available to buyers. Uncertainty over the extent and nature of future support for agriculture has already made buyers of rural land more cautious and increased the land market’s sensitivity to price.

So, where are the opportunities? In the commercial market we expect to see non-domestic investor demand continue to expand out from London and renewed enthusiasm for segments that fell out of fashion in 2016 and 2017 due to the negative impacts of the weakening of sterling. UK property still offers comparatively strong returns and lower risk against other geographies, and this will underpin demand from overseas buyers.

In the residential markets, the fact that the government has put housing at the centre of domestic policy should provide a platform for innovation, presenting significant opportunities for developers and investors. Despite extra funding for Help to Buy, demand for private rented properties will continue to increase. Together with the ongoing undersupply of affordable housing, this should underpin rental demand across a range of income groups.

In the rural market we expect caution to eventually give way to renewed investor confidence as the outcome of Brexit materialises. Towards the back end of the next five years, the fundamentals that have historically underpinned the sector’s performance should come back into play – shortage of supply, demand from competing uses, amenity offering and the tax benefits of ownership. Longer-term, we maintain our bullish outlook on forestry, energy and alternative food production.

Against a background of Brexit uncertainty, the bulk of investor demand will be for secure income stream across all sectors, presenting opportunities for investors who can create such product.

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Five-year projected performance

At the top of our table sits the urban logistics sector, which delivers the highest income yield and strongest capital growth prospects. Secure income is popular, and pressure on land, particularly inside London from other uses, will maintain undersupply and deliver extra rental growth.

Not far behind sit the residential markets of the North West of England and the West Midlands, which retain the capacity for house price growth by reason of fewer affordability constraints. Corresponding higher-income yields should underpin performance in this part of the housing market cycle.

Pressure is on agricultural property – most at risk from the decision to leave the EU and uncertainty around future agricultural policy. Nonetheless, we expect holdings of scale with options to diversify income away from agricultural production to remain sought-after.

The mainstream London residential market also sits at the lower end of the table. This reflects relatively stretched affordability that leaves it exposed to fickle buyer sentiment and an affordability squeeze as the cost of debt rises. It sits in contrast to prime central London, where the market has already seen a double-digit price adjustment and, separately, the growing build to rent sector that is underpinned by the fundamentals of an undersupplied rental market in the capital.

Our key investment opportunities

Commercial

Urban logistics

Strong tenant demand and competition for sites from other uses will ensure strong rental growth. The strongest growth will be inside the M25, but we expect to see this spreading to big regional cities.

Affordable offices

With business uncertainty rising as we move closer to Brexit, we expect that clever property decisions will be popular with occupiers. The best locations will be accessible and affordable.

Residential

Multifamily in the regional cities

With the build to rent, or multifamily, sector gaining traction and expanding beyond London, large regional cities, such as Manchester and Birmingham, offer an opportunity to capture higher yields with good prospects for underlying capital growth.

Strategic land in the South East

Pressure to increase housing delivery and set objective targets for housing need at a local level are likely to open up opportunities to bring strategic land through the planning process. Areas without an up-to-date local plan, or an insufficient five-year land supply, offer the greatest potential supported by a range of measures to encourage house building set out in the recent budget.

Rural

Reducing risk through diversification

As the agricultural sector faces turbulence during the medium term, units with the potential to derive alternative income streams will remain attractive. Reducing exposure to a single enterprise will counter heightened volatility and price risk. We expect demand and capital values to remain resilient in this sector.

Growing returns from woodland

Strong demand fundamentals support our bullish outlook on forestry. Marginally productive agricultural land could offer an opportunistic purchase with value added by either expanding existing plantations or establishing new woodland. Current financial incentives would bolster cash flow within the first three to five years of the cycle, and longer-term prospects for capital uplift look positive.

Footnote: how we compare income returns

In a world of data, it is surprisingly difficult to arrive at comparative income returns for different asset classes. For residential buy-to-let investments, our model uses a combination of data from the valuation office, the Land Registry and Rightmove. We have then had to take into account that while commercial property income streams will often be underpinned by full repairing and insuring leases, in the residential markets these are the responsibility of the landlord. Agricultural tenancy obligations sit somewhere in the middle. For consistency, we provide figures net of all irrecoverable costs in line with IPD industry standards.