Commercial property investment set to be down in 2018

Investment volumes in the UK commercial property market in 2018 will total around £55 billion with returns of 6.4%, down on the £60 billion expected to be confirmed for 2017, a new analysis suggests

The removal of capital gains tax exemption for overseas investors in UK commercial property could be seen as a temporary blow to the market, according to the research from real estate firm JLL but it does not believe the change will deter investors in the long term.

JLL also predicts that the UK, and London in particular, is likely to be a key destination for Japanese and Korean investors.

‘Undoubtedly there will be investors who are dissuaded by the capital gains tax changes, but the change only aligns the UK with most other developed countries. In spite of this, the major reasons for investing in UK property remain, such as liquidity, lot sizes, landlord favourable leases, the strong economic and leasing fundamentals, and at present, relatively high yields and a weak currency,’ said Jon Neale, head of UK research at JLL.

‘We also expect Korean investors to add weight to the broader push from Asia this year. While they have held back from adding to their UK exposure in the aftermath of the referendum, we expect a return in 2018, attracted by the market’s resilient performance and high pricing in other global markets,’ he added.

JLL’s property predictions for 2018 also include the sustained and resilient performance of the industrial and logistics sector and a continuation of the boom in deals for flexible office providers as more corporates take space. While proptech will continue to transform the industry, JLL highlights digital construction as one area that could have more dramatic impacts over the next few years.

Following a number of recent landmark deals, JLL forecasts that 2018 will see wider participation by institutions and pension funds in the alternative sectors. Appetite is being driven by a mix of long income opportunities linked to inflation, exposure to strong demographic trends and a number of sectors which benefit from a structural supply and demand imbalance.

It also suggests that there will be a rise of mixed-use alternatives as investors and operators will increasingly regard themselves as providers of living space and social infrastructure. The shortage of supply will result in established operators in one sector moving into a similar or complementary market.

Finally, amid continued political uncertainty, 2018 will be the year in which many companies finally make decisions about their business strategies post-Brexit, according to JLL.

Nevertheless, GDP growth looks set to be around 1.5% in 2018, roughly in line with 2017 and well ahead of some of the more pessimistic forecasts produced at the time of the referendum.

‘A deal with the European Union, even if it only covers transition, is likely to emerge towards the end of the year, but this means that this will be another year of Brexit uncertainty, with many in property still unable to make informed decisions. But in spite of this mood music, inflation will fall back, base rates will remain unchanged and employment growth will be solid, suggesting that the economy will grow at roughly the same rate as in 2016,’ Neale added.

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