23 April 2018
Paul Clark: Brexit not the only factor facing real estate
We settle into 2018 reflecting on a mixed picture for the UK economy. While it’s true we haven’t seen anything like the economic horror show that many had forecast would follow a leave vote, UK growth is down, with many businesses continuing to hold off on investment and consumers beginning to cut spending.
So far, UK prime real estate has proven relatively resilient. In the office market, cushioned by low interest rates and sterling depreciation, alongside continuing undersupply, we’ve so far avoided any material downturn in pricing. As for retail, while this is undeniably a tougher environment, we continue to see strong demand for high quality space in the best locations. As evidenced by the successful leasing of our development at Rushden and Oxford. In the prime West End, many retailers have actually benefited from recent record levels of international spend, again boosted by the weaker pound.
All of that said, we must acknowledge that, for a period, returns are going to be subdued with rental growth muted at best and transaction volumes down. Yet coming as this does after the extended Bull Run we’ve enjoyed over recent years, it’s hard to be overly surprised.
"For The Crown Estate, that means focusing on the fundamentals, working hard to address our customer’s needs and supporting their businesses as they evolve, to ensure we continue to supply world-class space and brilliant places."
Paul Clark, Chief Investment Officer, The Crown Estate
However, whatever the short term outlook, there are a host of factors which make London and the UK an attractive place to invest over the long term (deep, liquid and transparent markets, the rule of law, our language and time zone advantages, and a benign taxation regime) which means we have plenty of strong cards in our hand. However, they come with a health warning against complacency.
Now is the time to address the changes (and challenges) coming our way. If we don’t, the warning signs in today’s market may be just a taster of what is to come. The first, and most obvious of these, is to decide on the sort of economy we want to be after we leave the European Union and for us in the sector, what that will mean in turn for UK real estate. It goes without saying that the implications for our occupier markets, for access to talent, for financial services etc. of hard or soft, open or closed, ‘lite’ or otherwise, will be significant.
Yet, looming large as the negotiations do over our daily news and conversation, it would be a mistake to believe that it is the only, or even the most significant, force at play for our sector. Much longer-term trends, such as the shifts we are seeing in technology, demographics, environment, customer expectations and so on, are bringing in whole new ways of working and shopping, as well as fresh demands on our cities and public spaces. From flexible leases, to the growing use of data, our customers are thinking differently and real estate must keep up. For The Crown Estate, that means focusing on the fundamentals, working hard to address our customer’s needs and supporting their businesses as they evolve, to ensure we continue to supply world-class space and brilliant places.
2018 looks likely to be an attritional year for UK real estate. We should expect lower returns than we’ve become used to and asset managers will have to work harder to make their money, albeit helped out by structurally low interest rates and a glut of global savings. In the months ahead we must guard against either a false sense of security, or a single track focus around our relationship with the EU. Ultimately, whatever the outcome of negotiations, the future for UK real estate will rest on plenty more besides.
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