The UK Property & Construction Sector 2019

12/04/2019By Peter Hardy
The biggest concern for the UK Property & Construction sector is the prolonged uncertainty brought about by Brexit. However, despite this, real estate investors, developers and operators continue to look long-term.
property

Despite concerns over global economic growth, the UK will gain some support from the global economy throughout 2019. World growth will be marginally weaker in 2019 compared to 2018, though there are several issues floating around: a possible escalation of trade disputes; a possible debt default in an emerging market economy; rising interest rates in the US and stock market corrections. Historically these are indicators of a downturn, although an imminent global downturn looks unlikely, even given the UK’s extraordinary current political situation.

Output in services, manufacturing and construction has risen over the last nine years as the UK has experienced economic expansion.  Assuming a conclusion to Brexit negotiations, at some point in the year a 1.2% level of growth is predicted in 2019, down from earlier predictions of 1.6%, and the lowest level for 10 years.

Real Estate

2019 will see a wider industry shift, particularly among investors, to formalising technology and innovation strategies.  There will be more roles in UK real estate such as ‘Head of Innovation Strategy’ or ‘Head of Real Estate Technology’, which already exist in some institutional investor firms, but are sporadic elsewhere.  This will bring more accountability within corporate structures, with specific objectives and key performance indicators for technology and innovation programmes, all occurring as real estate businesses make technology a much greater priority.

Interest in the residential real estate investment sectors PRS, Student & Hotels continues to grow.  Although the for-sale residential market has cooled somewhat, rented housing, student accommodation, hotels and healthcare are growing sectors.  They display certain similarities in terms of operational risk and major supply-side constraints which drive price growth.  Against a background of sound long-term UK tourism fundamentals, the immediate challenge for UK hotels is predicting short-term hotel performance amid economic and political turbulence.

Lower economic growth and Brexit uncertainty will result in a slight fall in UK office investment and occupier activity in 2019.  The effect will be moderate rather than dramatic as business confidence remains healthy in London and core regional cities.  Flexible space operators and new transport infrastructure will continue to drive demand.

Leisure

Brexit, business rates, inflation, the growth of ecommerce and employee cost pressures weighs on the minds of UK retailers in 2019.  The retail and hospitality landscape is polarising into ‘experience’ and ‘convenience’, with shopping centre owners likely to reposition their assets accordingly.  Investment volumes remain low, but pubs, leisure and roadside retail are moving increasingly into investors’ sights as these previously niche sectors become more investable.

retail property

Ecommerce

The ecommerce revolution is driving sustained demand for industrial and logistics space in 2019, with demand for bigger ‘big boxes’ increasing the fastest.  ‘No deal’ Brexit concerns have not yet been a major force in driving demand, and speculative development is starting to address supply-side concerns.  Investment demand remains strong, but investors will need to keep an eye on innovations in logistics technology as they amplify quality differences between industrial assets.

There will be fewer data centre transactions in 2019 than in 2018, but this will be made up for by the size of those deals.  Providers of cloud services will dominate even more, and demand will stimulate a strong development pipeline.  Shortage of space within London will cause developers to look further afield.

industrial property ecommerce building

Against a backdrop of fluctuating interest rates and global economic disquiet, total returns for UK property should remain fairly appealing to investors, as the asset class demonstrates both resilience and recovery.  Income returns should continue to be the mainstay of performance, with a slight rise in rents being offset by a modest overall rise in yields as interest rates end the period higher than they began it.

The real estate market remains surprisingly resilient in the first half of 2019, and if the wider political picture was, by some miracle, clarified then the outlook might be even better.

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About the author

Peter Hardy

Managing Director

Peter leads psd‘s work in the Property & Construction sector. He recruits senior and board level positions in development, construction, fund management, private equity, property services, PRS and affordable housing.