Outlook for 2018
At the end of 2016 we were “cautiously optimistic” about the prospects for 2017. We foresaw continuing strong demand from Private Investors for quality investments with perhaps a cooling in demand for more secondary and tertiary locations. We thought total sales were unlikely to exceed 2016’s level but hoped that they might be close. In the end with only £5m difference we are not unhappy with our predictions or the result.
Forecasting an outcome for 2018 looks more challenging than last year. Once again there are a number of significant issues which may impact the private buyer market. Interest rates; when will we see further rises – Brexit; will there ever be any positive news? Will Teresa May be able to keep enough support to remain Prime Minister? As we go to print it appears there has been progress towards starting discussions on a future trade agreement. One thing is clear, as the negotiations so far have been challenging, one can only imagine what the next stage will be like. On a positive note the FTSE finishes the year at an all-time high.
In its latest quarterly report the Bank of England predicted subdued economic growth of 1.6% for 2018, with inflation falling back to 2.6% with interest rates predicted to rise to 1% by 2020. With investment returns so low elsewhere and with the prospect of only modest increases in interest rates over the next few years it would seem likely that Private Investors will continue to look favourably on the real estate sector. Indeed our regular buyers’ survey reveals that 96% of all buyers intend to purchase again in the next 5 years, with 82% indicating they are likely to buy in the next 12 months.
This correlates with our view from the rostrum where we can still see a good number of bidders per lot, particularly for those generating long term secure income. If buyers are being honest with us, there is little obvious borrowing happening in the auction market, with 85% of buyers reporting they require no finance for their purchases. Warnings by the Bank of England relating to rising consumer and residential mortgage debt have been well flagged but little has been said about commercial property debt, which might infer that there is still subdued lending to the sector. The observed rise in average yields over the last 6 months would suggest there has been a price adjustment to reflect the slightly uncertain outlook. However it should be remembered that within those averages some very low yields have been paid for the most sought after properties where competition has been keenest. Quality always shines through.
With weak economic growth it would seem likely that tenant demand will continue to drift in all but the most sought after areas. In the weaker areas, yields may continue to move out gradually following the trend which has already been observed.
On the supply side, we continue to see a wide range of Vendors coming to the market, including Private Equity Groups, divesting their loan book purchases, Private Investors, a number of whom are trading and Property Companies who are breaking up and rationalising portfolios. In 2017 the Business Rate Revaluation has undoubtedly had an effect on rental values in the areas where Rates have risen steeply. Where Rates have fallen, rents have remained subdued as properties are generally located in areas of weak tenant demand in any event.
This year in April sees the implementation of Minimum Energy Efficiency Standards (MEES). Very simply if a building has an EPC rating below E then it cannot be let on a new tenancy or sold. Most owners seem aware of this legislation but some older properties when they come up for lease renewal, may require significant capex to be brought up to standard. It remains to be seen as to how many of those economically un-viable buildings there are and if their numbers have any effect on the supply of assets to the market.
In summary we feel it would be prudent to temper our optimism from this time last year. If assets are correctly priced there is still extremely strong demand from investors with some historic low yields continuing to be paid. We see no reason why demand from private investors should change significantly in the foreseeable future, as long as interest rate rises remain modest.
Weaker tenant demand in secondary and tertiary locations may well lead to further easing of yields, unless the properties in these locations are let on long leases to the best covenants. For better quality assets we do not see any reasons for pricing to suffer further significant changes, as it would appear already to have adjusted. Perhaps more than in recent years, pricing is going to be critical if a successful result is to be achieved.
Thank you to all our clients and buyers for their support in 2017 and we look forward to working with you again in 2018.