The UK will remain a key investment market for domestic and global investors in 2017 but it is important to be very selective with opportunities, according to LaSalle Investment Management’s Investment Strategy Annual (ISA) 2017 edition.
Confidence in the UK occupier market held up much better than most expected immediately after the Brexit Referendum, and prime assets have traded at little or no discount to their pre-referendum valuations, the ISA finds. But investors should be prepared to encounter stretches of elevated capital market volatility in 2017-2018.
LaSalle remains a core income-focussed buyer in the market and will remain so for the year ahead, but this will not be at any price, and must be under certain conditions. Depending on the opportunity, the business also remains committed to taking leasing risk on assets in favourable locations in the UK, depending on market opportunities and taking into account the potential Brexit impact on tenants.
Elsewhere in Europe, the ISA anticipates that occupiers and investors will continue with their pre-Brexit business plans based on modest growth in Germany and France, and stronger economic performance in Spain, Poland, Sweden, and to a lesser extent, the Netherlands. Furthermore, the report finds that competition for core income-producing real estate is expected to remain intense.
Mahdi Mokrane, Head of Research and Strategy for Europe at LaSalle, said: “We believe that the UK will remain one of the world’s most transparent, liquid and supportive destinations for investors in spite of the current uncertainty around the country’s future relationship with the EU. Looking ahead, given the prospect of a hard Brexit, fewer of the larger, longer-term occupier decisions are likely to be made until much of the volatility has dissipated.”
In the UK, LaSalle will remain focussed on the following investment themes that are expected to outperform over the long term:
- Long-leased retail that offer accessible, flexible and affordable solutions to ever-demanding retailers offer a defensive investment profile.
- The private rented residential sector (PRS), which will be one of the clear winners in the years ahead given the chronic undersupply of housing in many parts of the UK.
- The London office market may offer short term investors Brexit-led re-priced investment opportunities whilst continuing to generate longer term investment options in attractive emerging locations.
- In a low-interest rate environment, mezzanine lending is one of our best income-rich strategies as a tighter regulatory framework is also forcing traditional lenders into a more conservative and risk-averse stance.
Across Continental Europe, future elections could become socially disruptive and cause significant capital market volatility. The short-term market impact in 2017 is likely to vary in magnitude depending on the global implications of the political risk. In these countries, the ISA recommendations include the following themes:
- Core office investments in cities such as Paris, Amsterdam, Frankfurt and Munich should outperform average EU-wide returns.
- Dominant shopping destinations (particularly in France), as well as high street retail pitches (in Sweden and Germany) in thriving commuter towns.
- Urban logistics will continue to offer relatively high yields whilst underlying land values are expected to increase as populations and the urban fabric expands.
- Residential developments in the Netherlands and Germany are favoured as a develop-to-hold strategy whilst avoiding any planning risk.
At a global level, this year’s ISA recommends that, over the long term, investors should look to balance ultiple risk-return strategies in a broad-based international real estate investment portfolio which can run in parallel with a larger, domestic programme. It also recommends reducing portfolios of non-strategic assets, reducing leverage, and being aware of liquidity needs if and when credit tightens. However, among the shorter-term opportunities, investors should consider taking leasing risk where markets are growing, pursuing development in supply-constrained markets where demand is strong, and bidding on strategic long-hold assets which are most likely to be able to withstand a downturn.
Jacques Gordon, Global Head of Research and Strategy at LaSalle, said: “As we look to the year ahead, across the G-7 a shift to more expansionary fiscal policy and away from reliance on monetary policy, along with the potential for protectionist trade policies, could accelerate the end of the “triple low” regime (economic growth, inflation, and interest rate). These factors are all likely to be at work in the US economy during the next three years. These same policies could possibly push the UK to higher rates.
“Investing solely in domestic markets greatly reduces the number of potentially rewarding opportunities to take advantage of in the next two years. The winds of change will be blowing through the world economy in 2017. Headwinds and tailwinds can both be expected, along with market turbulence.”
SOURCE: LaSalle Investment Management