A quick scan through the main commercial property market indicators for the period since 2016 suggests that uncertainty has not been particularly bad for business. Office leasing has been driven by pre-letting and the technology, media and telecoms (TMT) and serviced office sectors, logistics by omni-channel retailing, and overall investment by comparative risk and yields on a global stage.

This suggests that, when political uncertainty diminishes, there may not be the bounce some commentators have predicted. There are, however, some areas where a bounce may occur – and they might not be the most obvious places.

The first is the return of non-domestic institutional investors who have chosen to stay out of the UK due to Brexit. These funds, predominantly from Europe and Japan, have considerable amounts to invest and an increasing bias towards property due to low base rates in their home countries. We expect the bulk of this money to be focused on larger, secure-income assets, centring on London and a handful of prime regional city offices, as well as logistics.

Limited stock

The challenge for these investors is that the traditional lifecycle of such assets has become rather broken in recent years. Development activity in the office market is close to record low levels, and future supply of prime long-leased stock will be tight. Unlike previous periods of uncertainty, there has been very limited distressed selling, with many investors choosing to refinance rather than sell assets.

While yields on these kind of assets are historically low, they are high relative to other global markets, and this will be enough to convince some investors to increase their weightings to the UK. There is also an argument that parts of the UK market, most notably central London offices, have missed out on the rental growth seen in other European cities. For once, London is following rather than leading the occupational cycle, and this will enable investors to justify paying cyclically low yields for another few years.

If the traditional build-let-sell lifecycle has been damaged by the global financial crisis 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, and this does not look likely to change.

We do expect to see a rise in office development starts from 2020, but this will not be enough to satisfy demand. Developers’ margins will be challenged by rising site prices, construction costs, and the cost and availability of development finance.

Rethinking retail

The prevailing wisdom of the past few years has been that selling retail and buying logistics should be at the core of every investor’s strategy. However, the outlook is not quite so simple, and the returns from tactical buying of retail could exceed those from paying record low yields for hotly competed-for logistics property.

While there is nothing wrong with buying good logistics, investors should take note that, not only are yields at record lows, but also that the sector faces its own structural challenges, including staff availability, the rise of autonomous trucks, and competition for land from housebuilders.

Retail is undoubtedly a cold, hard place to be in at the moment, but 2020 will be the year when we start to see some investors capitalise on the falls in prime yields. Retail is not dead: even in the UK, where we shop online with a fervour that is unmatched in most other countries, more than 80% of everything we buy touches a shop in some way. With capital values on prime retail schemes having fallen by 20% or more in the past two years, the point at which a major investor calls the bottom of the cycle may not be far away.

We expect to see a major opportunistic investor take a large position in the UK retail space in 2020, attracted by price corrections big enough to allow a rebalancing of rents to a level that is acceptable to struggling retailers. Such a deal would call the end of the stalemate between vendors and purchasers of retail on pricing.

_{Read the articles within UK Cross Sector Outlook below.}