UK Capital View: Summer 2019 Overview
Investors continue to respond to structural changes across the real estate sectors and a lower interest rate, lower return environment. Driving income growth remains the focus for investors.
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UK GDP growth accelerated to 1.8% y-y in Q1 2019. The economy is forecast to continue to enjoy steadily accelerating growth over the rest of the year and into 2020. This is compared to parts of mainland Europe, which are expected to see economic growth ease after a stronger period of economic expansion.
Brexit related uncertainty and weaker investor sentiment in the retail sector contributed to UK all property investment volumes declining by -22% y-y in Q1 2019. However, this is a softer reduction than the decline in transaction activity globally (-24%) and for Europe (-32%). Economic and political uncertainty is not just a UK-centric Brexit related issue, but also a global theme.
While overall UK transaction volumes were down by historical standards, investment activity in the industrial and leisure sectors outperformed their first quarter long-term averages in Q1 2019.
There is contrasting investment performance across the UK property sectors. The Industrial sector continues to outperform the wider market with an annual total return of 13.7%, followed by Healthcare (9.3%) and Hotels (7.9%). Supermarkets remain in positive territory, but other retail is seeing negative annual returns.
Structural changes continue to affect investment returns on the upside and downside across different sectors. On the upside, technology is helping support longer lease lengths in the industrial sector, while long-term demographic trends are helping shape the growing healthcare and residential investment markets. On the downside, weak occupier fundamental continue to hinder investment sentiment and subsequent performance in the retail sector.
We expect investors to look towards local market fundamentals, rather than country level economics. Income remains the focus. This should see investors venture into neighbouring or regional markets which are benefitting from strong local occupier market fundamentals. This strategy will apply to all asset classes, as the performance of the strongest markets continues to diverge from the performance of the weaker markets.