The value of predictions – taking stock of real estate
September 02, 2015
It may not have felt like it but July was Earth’s hottest month on record. Meteorologists are predicting it may be the hottest year ever recorded. So how useful are these predictions and what do we do differently because of them?
This blog is not about our collective response to global warming but the value of predictions. I like to take stock after the summer holidays. Reflect on what we said at the beginning of the year about the real estate market and what has changed.
In search of yield
A lot has happened since we launched Emerging Trends in Real Estate - Europe 2015 with the Urban Land Institute (ULI) in January. China, Greece and a general election have all impacted the markets. Overall the sentiment was spot on. We thought that investors would need to continue to move up the risk curve in search of yield and they have. So the flow of funds out to the regions and into secondary assets and the alternative sectors gathered momentum (with prime yields in central London now as low as they have ever been….so no surprises there).
Offices and industrial have led the way in the recovery of the regional and secondary markets, driving steady yield compression. Overall yield compression across the market accounts for much of the 15.6% total returns seen in the 12 months to the end of June 2015.
...it's not just London
Whist yields across the sectors and regions may have further to go, the rate at which these move in will inevitably slow such that future returns must increasingly rely on income return and rental value growth. And the good news is that rental growth is returning to the regions. In Emerging Trends in Real Estate – Europe 2015 participants rated Birmingham ahead of London as a future investment prospect. Birmingham has led the way of regional cities in the first half of 2015 in terms of take up of new and grade A office space.
But growth is fickle and in the regional markets depends on continued improved local infrastructure and successfully navigating further devolution. See the latest blogs from my colleagues Tina Hallett (A central government take on 'decentralisation by design') and Jonathan House (Firing up the powerhouse: summer budget sets out next steps for decentralisation) in our Government and Public Sector team for the opportunities and challenges facing regional markets.
I am happy with our cautiously optimistic view of 2015 for the real estate sector. The challenge for investors going forward will be to find opportunities to add value and drive rental growth to deliver returns. Stock selection underpinned by property fundamentals will continue to be key.
What will you be doing differently in light of these predictions? How will your investments be shaped by regional devolution and local infrastructure? Share your thoughts below or schedule a meeting to discuss your situation in confidence.