2019 Market Outlook – Brexit, ‘beds’, and blockchain
We’ve just released our annual report looking at how economic, political, and technological forces will affect property markets in 2019 and beyond. Here’s a quick summary.
The equity markets experienced substantial volatility at the end of 2019, which we think heralds a gradually weakening global economic environment, with notable risks around trade and sovereign debt. While economic growth in the US remains robust, we expect UK GDP growth in 2019 of 1.5%, only slightly stronger than 2018.
No prizes for guessing why. Very turbulent UK politics arising from Brexit will continue well into 2019 causing hesitation and delay for businesses, consumers, and property markets. Our report contains an extensive section on Brexit in which we hold to our ‘base case’ that the withdrawal deal, and a reasonably comprehensive free trade agreement, will eventually be signed. But we place a 40% probability on a ‘no deal’ outcome.
So, for now, we expect subdued consumer spending and business investment arising from a weak currency, inflation and Brexit uncertainty. The labour market is now quite tight in the UK, and while in-migration has picked up a little over the last year after a rather weak 2017, office-based employment growth will be slightly lower in 2019 than in 2018.
This rather underwhelming economic picture translates into rather modest total returns for real estate investors; we expect average returns of just under 3% per year over the next five years (see Figure 1 below for our returns forecast by sector) – though that performance will be back-weighted, making the next few years rather tough for investors.
Within real estate investment classes, our sectoral picks continue to focus on the so-called ‘alternative’ sectors and in particular the ‘beds sectors’ (residential, student accommodation, hotels and healthcare). These sectors either exhibit non-cyclical characteristics or have very significant demand and supply mismatches. The institutional private rented sector will continue to attract significant interest from investors seeking stable and sustainable returns.
Retail also remains a sector to watch in 2019, with further turbulence likely as cyclical factors combine with structural and one-off factors (ecommerce, business rates) to cause further disruption to the high street. Opportunistic buyers are starting to circle in the light of falling values. Even so, we think that both prime, experience-oriented and convenience retail will continue to exhibit resilience, and convenience roadside retail looks like a sub-sector to watch. My colleague Tom Berry has recently written about the ‘perfect storm’ in retail here.
Finally, our report looks at technological developments affecting real estate in 2019. The scene seems set to mature. Investors and occupiers alike will put in place clearer strategies and senior accountability for innovation, but only the innovations which actually solve real issues will survive and prosper. So we’ll thankfully see an end to the ‘tech for tech’s sake’ mentality. We identify five specific technologies, including blockchain, which we think will have the biggest effect on real estate investors and occupiers.
You can download our 2019 Outlook report here. Enjoy.
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