Threats and opportunities in UK property

Economic and political uncertainty have risen in the UK and London. What are the threats and opportunities this uncertainty carries?

19th May 2016

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Is the UK property cycle at a turning point?
UK property total returns have been gradually weakening since the second half of 2014, admittedly from exceptionally high levels, but in Q1 2016 the downswing picked up pace. This has been largely due to a less positive impact on capital growth from yield compression, which virtually ground to a halt in Q1 2016. Rental growth is holding up better, but it too has slowed in recent quarters. Undoubtedly the jolt to financial markets in early 2016 and increasing political uncertainty have been behind the slowdown, but more recently there have also been signs that global and domestic economic performance is faltering. London has not been immune to the slowdown: indeed total returns for central London office and retail properties have decelerated faster than the UK average. However, rental growth in London remains at a healthier level, particularly for top quartile properties, and occupier fundamentals are still solid. Nonetheless, we are keeping a close eye on vacancy rates, which have recently edged up slightly from their post-GFC lows. One other relative bright spot has been the UK residential sector which, according to MSCI/IPD, was by far the outperforming sector in Q1 2016. 
Political risks have been elevated for a while in the UK - what particular areas of concern do you have?
The UK has had its fair share of political uncertainty in recent years. The current focus is on the forthcoming EU Referendum, but this follows what was an uncertain General Election in 2015 and more distantly a relatively close Scottish Independence vote in 2014. On top of this London has recently elected itself a new Mayor. While it is true that heightened political uncertainty did cause national consumer and business sentiment to deteriorate, there is little evidence that property performance suffered directly as a result. What seems to matter more is the underlying direction of travel of the market which, as discussed above, has been on a gradual downward trend for some time. We are concerned about the vulnerability of the economy and property performance to a geopolitical shock that a Brexit might cause, largely due to the heightened policy uncertainty at a time of general economic fragility.
London has a new Major - what opportunities and threats might that bring?
The new incumbent – Labour MP Sadiq Khan – has stated his priorities are to protect and advance London’s competitiveness and status as a world-leading city, and to tackle the housing crisis. He also aims to be the most pro-business and greenest Mayor yet, while improving the safety, security and affordability of the public transport system. These are all laudable goals that would advance London’s position as a pre-eminent global city. London is at the centre of so many global trends but the new Mayor needs to be bold to ensure it stays ahead. The challenge is to deliver these improvements while ameliorating the chronic affordability problems facing residents and businesses. The Mayor should establish new resources and focus so that the Greater London Authority (GLA) moves from a body that sets strategy and policy to one that pushes, and where necessary intervenes, to get more homes built. The GLA could instigate collaboration with London’s boroughs to unlock the greatest opportunities and ensure that public investment in infrastructure underpins the delivery of those opportunities.

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