How will 2017 be for UK commercial property?

By Paul Norman - Thursday, January 05, 2017 10:30

2016 was marked by a profound shift in focus for UK commercial property markets as political events increasingly were a factor in driving, or stalling, decisions. So what do the experts make of it all now and how will 2017 shape up for UK property markets? CoStar gets the crystal ball out with key market players to gauge expectations for returns and investment volumes as well as focus on sector specific predictions. Click through to read the results and watch video interviews.

Click here to watch CoStar's video interviews with key industry figures about last year and the year ahead. 

Political turbulence and a clear fall in sentiment and transactions generated particularly by the referendum vote last year have meant that uncertainty and caution are likely to be the dominant themes for UK property people in the months ahead. That said, as 2017 gets underway the industry is putting its best foot forward convinced that UK commercial property will retain its long-term appeal in comparison with other investment opportunities whether Brexit is hard or soft, red, white or blue.

Commentators highlight the UK’s continued safe haven appeal for investors driven by high levels of transparency and stable legal structures and there are plenty prepared to argue that fresh opportunities are arising thanks to the changing business climate.

Angus McIntosh, Economist and Consultant at Real Estate Forecasting, says: “Property is well placed to out-perform other investment asset classes in the medium term with average total returns likely to exceed 5% pa, which, when inflation (which may increase) is expected to remain relatively low, is very satisfactory.

“Whilst the peak of commercial total returns was 2014 in this cycle, a slow down in the short-term to around 3%, is lower than predicted a year ago. Rental growth will also be muted, if there is any.

“In these economic and politically unpredictable times, recently dominated by Brexit and "Trumponomics", hands on day-to-day tenant property management, and a very careful management of our towns and cities, will be even more important. Investment in better infrastructure will be paramount.”

Tony Horrell, CEO UK & Ireland at Colliers International, says 2017 will be characterised by uncertainty in the UK with markets “peppered with reservations about European political stability and Trumponomics”.

He adds: “However, with uncertainty comes opportunity. The UK remains one of the most transparent and active places to do business, and currency arbitrage by international investors is opening up opportunities for new and greater investment which will no doubt help to drive the UK real estate market in 2017.”

Anthony Duggan, a partner in Capital Markets Research at Knight Frank, agrees with the sentiment: “Importantly, we see the UK becoming less of a ‘Brexit outlier’ as political risk and uncertainty echoes around Europe and the western world. Combine this with signs that infrastructure spending is rising up the government’s agenda, a continued low interest rate environment plus the relative weakness of the currency and there are solid reasons to believe that the UK will remain attractive to global capital.”

Savills, at its recent predictions breakfast for the year, said the unexpected political events of 2016 will lead to a rise in caution and risk aversion among real estate investors in 2017, making secure income streams more highly prized among core investors globally. It predicted this over-riding macro picture will benefit the UK market thanks to its high levels of transparency and stable legal structures which make real estate a safety play.

“Brexit uncertainty will not stop people making commercial property decisions,” said head of UK commercial research Matt Oakley. “At the same time there is a belief that the UK is riskier. That will create opportunities.” Oakley added that as the realisation grows that the negotiations on how we exit and then trade with the EU will be long and bumpy, businesses will need to continue making staff and property decisions.

2017 returns and investment volumes

Colliers predicts total returns to recover slowly over the year.

“Total returns in 2017 will show a very modest recovery over the 2016 collapse, but will struggle to breach 2%. Rental growth for all property will be flat and the minus 3% negative capital growth trend seen in 2016 will be replicated in 2017,” said Martin Mahmuti, Associate Director, Research and Forecasting at Colliers International.

Investment wise Colliers is predicting that UK investment volumes will recover slightly in 2017 as investors “see through Brexit uncertainty” to exceed £50bn.

Richard Divall, Head of EMEA Capital Markets at Colliers International, predicts that the investor base will widen. “With sterling remaining competitive, further new entrants, particularly from Asia, are expected to help support the UK market. As has been the case for some years now, the liquidity and transparency offered by the UK will continue to attract global institutional money as allocations to real estate increase to above ten per cent of assets under management.”

Anthony Duggan, at Knight Frank, says: “Rents will fall in some markets as occupier demand pauses and values will follow for secondary product. However, we do not expect this correction to be extreme and overall expect All Property total returns to be in the region of 2-3%.

“The main trend for the year will be the bifurcation of prime and secondary assets. The best quality opportunities will continue to attract a very strong following with investors looking to the UK as a safe and secure place to obtain property exposure in a fragile and uncertain world. We expect robust demand from UK institutions still looking to property to match long-term liabilities and also searching for bond-like returns as they rotate out of gilts.

“Global private investors will continue to see the UK as a first port of call for diversifying their holdings and protecting capital. Overseas institutions and conglomerates will look to London and key regional centres as a safe place to park capital and, more strategically, as an essential and significant part of their growing global property portfolios.

“So overall, at Knight Frank we expect 2017 to be a continuation of the solid year of returns and transactions volumes we have seen in 2016. We are just hoping it is less eventful!”

Savills is predicting average total returns on UK property investments are likely to be approximately 5.6% per annum during 2017-2021, with a 0.4% five year capital growth forecast for office values and a 4.4% growth forecast for office income returns.

It says commercial property assets with long lease structures and strong rental covenants will continue to attract attention, while institutional investor appetite for large residential portfolios is expected to continue to grow. The relatively high yields and strong income flows from commercial property will continue to attract strong demand.

Savills’ head of commercial research Mat Oakley said: “In a world of uncertainty investors will swing to an income producing and risk off strategy and property will do well from this with prices rising for these assets. The real opportunity is to create long-term secure income producing assets whether through developing this product or filling up voids to create product for those chasing these assets. We believe this is where the best returns will be.”

Matthew Richardson Head of Real Estate Research at Fidelity International, predicts that the US and Middle East will remain the predominant source of allocations in UK commercial property as domestic UK investors retreat from the market and Chinese mainland and Hong Kong investors take a growing interest in the London commercial property market,

Overall, Fidelity International believes that UK commercial property values will remain relatively stable in 2017 with any value adjustments taking place via the currency markets.

“Money coming into the UK commercial real estate investment market from mainland China and Hong Kong is a fairly well known story with far eastern investors making the most of a weak sterling while also looking to diversify outside of their own domestic market.

“However, this is not the only source of capital into the UK commercial property arena. The longer term figure show that, over the last five years, the US has generally been steady investors in the UK and this phase in the cycle is no different.

“Provisional data shows that in the last three months of 2016, US inflows rose by a third when compared to Q3. And as things get riskier heading into 2017, we would expect to see a further increase in allocations from the US as, generally speaking, they have a greater appetite for risk compared to many other overseas investors.

“And they aren’t the only players. Money from the Middle East also outweighs that emanating from China with allocations nearly tripling between the third and fourth quarter of last year.

“But what of the domestic UK investor? In short, they have been in steady retreat from the market, reducing the volume of investment purchases by nearly 75% when compared to this time last year.

“Looking ahead over the next twelve months we expect UK commercial property values to remain relatively stable until details of the BREXIT process become clearer. Even then, any value adjustments may be made via the currency markets rather than in Sterling terms as UK market demand/supply fundamentals remain positive for the moment. In a period of falling or flat capital growth, income will become the primary driver of performance and the current income yield of 4-6% from good quality UK real estate assets should continue to attract investors looking for a stable income return.”

Other key themes for 2017

Savills is predicting that the shape of the rental cycle will change. Prior to the referendum the agent was predicting that some kind of shock would slow the occupier markets towards the end of the five-year period. The Brexit vote it says has brought forward the “shock” in the rental growth story that would have been move evenly spread over the coming years.

Savills predicts some markets and sectors will see falling rents next year than a flattening the year after and then growth again at the back end of the five-year forecasting period.

“Brexit has brought falls in rents forward,” said Savills’ Oakley. “The change is the pain is coming now rather than later. That said we expect central London retail and London industrial to continue to be strong performers.”

Mahdi Mokrane, Head of research and strategy for Europe at LaSalle Investment Management, believes the UK will remain one of the world’s “most transparent, liquid and supportive destinations for investors in spite of the current uncertainty around the country’s future relationship with the EU”.

That said Mokrane says that looking ahead, given the prospect of a hard Brexit, “fewer of the larger, longer-term occupier decisions are likely to be made until much of the volatility has dissipated”.

In the UK, LaSalle will remain focussed on long-leased retail assets, the private rented residential sector (PRS) and the London office market.

It says PRS will be “one of the clear winners in the years ahead given the chronic undersupply of housing in many parts of the UK while London offices may offer short term investors Brexit-led re-priced investment opportunities whilst at the same time continuing to generate longer term investment options in attractive emerging locations”.

In a low-interest rate environment, LaSalle said mezzanine lending is one of its best income-rich strategies as a tighter regulatory framework forces traditional lenders into a more conservative and risk-averse stance.

“Investing solely in domestic markets greatly reduces the number of potentially rewarding opportunities to take advantage of in the next two years. The winds of change will be blowing through the world economy in 2017. Headwinds and tailwinds can both be expected, along with market turbulence.”

Will Rowson, Partner at Hodes Weill, says 2016 has made the real estate world smarter and more prudent.

“2016 was full of surprises but we have been amazed by how resilient the real estate market has been. The UK real estate market has seen no immediate impact although institutional investors have seen some delays. The depreciation in Sterling has allowed for private investors to fill the gap in the market, but geopolitical risk has slowed down decision making.

Looking ahead Rowson says: “Fixed income still needs to rise a lot for it to challenge real estate as an investment. CIOs still believe getting the worst real estate deal is better than the best fixed income trade. Some real estate investors have compared 2017 to flying a plane. Radars can predict bad weather in the distance but sometimes you can’t see what is much closer and you are flying blindly into.

“The impact and fallout of the Brexit vote will continue to be felt into 2017 yet other events such as the elections in France, Holland and Germany, as well as the Italian referendum will all have an effect on the market.”

Scott Brown of Barings Real Estate points to the evolving definition of the real estate investable universe as a key theme going forward: “There is increasing acceptance of so-called niche property types (e.g. hotels, self-storage, seniors housing, student housing and parking), as well as both mortgage debt and global real estate securities, into allocations traditionally focused on the four standard property sectors - office, retail, industrial and apartments - is changing the real estate investment landscape. The progression toward a broader definition of the investable universe is largely a result of increasing transparency and familiarization with these sectors, and can also be attributed to increased competition for assets in the traditional property sectors and a growing recognition that these evolving opportunities could present enhanced return prospects and additional portfolio diversification benefits.”

Sector specifics

Industrial shines

The industrial and logistics sector remains a clear favourite with investors, seemingly “Brexit” proof in the right locations thanks to the ecommerce revolution.

Savills predicts: “Specific opportunities are available in logistics warehouses in strong locations such as the Midlands and the M25 area. With availability at record lows and demand unaffected by the uncertainty, this sector looks likely to continue to out-perform the rest of the market due to its long and often indexed leases, as well as the landlord-friendly dynamics in the occupational market.”

Colliers forecasts that industrial sector returns will “stack up”.

“The industrial sector is set to be the strongest performing sector for the next four years with annualised returns in excess of seven per cent. This is supported by an acute shortage of quality stock in many parts of the country and the insatiable demand from “want it now” consumers driving e-commerce logistics demand,” said Len Rosso, Head of Industrial and Logistics at Colliers International.

London offices

The potential for 2m sq ft of grey space to be released in the central London office market in 2017/18 is likely to contribute towards an increase in vacancy rates and a softening of rents, forecasts Colliers. However, the “tech-driven City Fringe market is predicted to remain pretty robust”.

“Businesses are unlikely to shake off the feeling of uncertainty in 2017 and, as a consequence, we can expect a slower absorption of space across London as occupiers look more closely at total occupational costs and are convinced by landlord incentives to stay put at lease expiry,” said Paul Smith, Director and Co-Head London Offices at Colliers International.

A late surge of City deals towards the end of 2016 has seen Central London take-up edge towards its long-term average level of 10m sq ft in 2016, notwithstanding the uncertainty caused by Brexit, JLL has said.

According to JLL’s latest figures, despite take-up in Central London being subdued in the lead-up to and immediate aftermath of the referendum, City take-up surged in Q4, and is expected to reach 5.3m sq ft by year end, just 6% below the long term average. This is offset by strong take-up in East London, where the recent deal to the GPU at Canary Wharf propelled take-up to 8% above its long term average level. West End take-up is on course to be in line with its long term average of 3.3m sq ft

JLL said the figures show that demand has held up much better than many commentators expected, and will help mitigate against rising vacancy in the near term.

Neil Prime, Head of Central London Markets & UK Office Agency JLL, said: “The recent surge of City deals is encouraging news for Central London, and the City in particular. It demonstrates that demand has been more resilient than many feared, in many cases tenants are seeking more flexibility and earlier break options to address the uncertainty around Brexit rather than abandoning requirements altogether. Businesses are undoubtedly more cautious, but the desire to consolidate operations and upgrade functionally obsolete stock remain key to business strategies.”

Ben Burston, Head of UK Office and Capital Markets Research, said: “While the quarterly pattern of activity has been inconsistent, the level of take-up over the year as a whole has actually been very solid. Recent PMI survey and employment data has been encouraging, but sentiment in the London office market has been weaker than this would suggest; the latest take-up data helps bring office market performance back in line with these wider economic indicators.”

Regional offices

Another market that is bearing up relatively well despite initial fears are South East office investment volumes which according to Knight Frank will have hit close to £3bn in 2016, well ahead of the long term average.

After a record breaking 2015, the year began slowly, with AEW’s acquisition of the Bath Road frontage in Slough from Segro dominating the first quarter. The second quarter was relatively muted, ahead of the Referendum, but the second half of the year has seen volumes steadily build as “Brexit fears subside”, reports KF investment agent Simon Rickards.

He says: “Transactions such as these reflect the market’s most prolific buyers in 2016, with overseas investors and councils taking advantage of a relative pause for breath from the UK funds, and accounting for 74% of volumes between them.”

Colliers is predicting that back office relocations will boost second tier regional cities

“Renewed emphasis on reducing costs will continue the push for cost effective back office space and the right sizing of requirements. Cities such as Southampton, Bournemouth, Nottingham and Sheffield could all benefit from increased demand,” said Mark Charlton, Head of Research and Forecasting at Colliers International.

Retail braced for tough 2017

The Christmas figures beginning to appear this week have only cemented the feeling that retail will face a challenging year

The retail sector and retail property markets are braced for a range of challenges next year, not least increasing costs as a result of the fall in the value of sterling, rising business rates costs following the revaluation, a hike in the National Living Wage from £7.20 to £7.50 per hour, and the introduction of the apprenticeship levy in April 2017.

According to the KPMG-Ipsos Retail Think Tank’s latest white paper, sales are expected to be slightly higher in 2017 than this year’s estimated growth of around 1.7%, driven by inflation and some modest food growth. A decline in non-food sales, however, will drag down overall growth.

“We are projecting it to be a really tough year for retail but we are also highlighting that a lot of the challenges were there before the 23 June. It is too easy to say it is because of Brexit,” says Paul Martin, head of retail at accountancy firm KPMG. “Organisations are going to have to look significantly at their cost base and look where they can make savings.”

Property experts predict challenges as well as opportunities.

Chris Taylor, head of private markets at Hermes Investment Management, said: “Retail will remain a core asset class in 2017, however, it needs to be asset-managed in order to meet consumer needs. Throughout our retail portfolio we are doing just that, including a considerable £90m investment at Royal Victoria Place (RVP) in Kent, which will transform its restaurant and leisure offering.

“We are also increasingly seeing investment in retail within large-scale, mixed-use schemes that address demographic lifestyle changes such as urbanisation, globalisation and technology – as can be seen at NOMA in Manchester, Paradise in Birmingham and Kings Cross in London.

“Mainland Europe will also offer some particularly attractive retail returns in 2017, which we will continue investing in through our strategic partnership with likeminded investor, Redevco.”

Charlie Barke, head of shopping centre investment at Knight Frank, says: “In 2017 retail should start to look reasonably good value again, especially against the other mainstream property sectors, most notably offices. Similarly, retail will finally end its several-year run of market underperformance, due to the stability of prime assets (income and yield) and the relatively high income return offered by non-prime.

"The gap between “the best” and “the rest” in the shopping centre sector will grow, with the continued outperformance of prime. The “non-prime” sector remains a market where only the better operators and managers will deliver outperformance.

"Next year will also see the re-establishment of global demand that waned in 2016. However, market volumes are likely to remain low, with especially low levels of “on-market” transactions. London and the South East will benefit from significantly greater liquidity than the rest of the UK.

"Some owners of “non-prime” assets will start to accept the need to sell at lower levels than those to which they originally aspired, which should create a greater degree of liquidity in this market. Yields look relatively stable but where non-prime assets are still seeing income erosion, values could suffer further falls.”

Colliers says that high streets and retailers need to prioritise quality and getting their offer right.

Colliers International’s Head of Central London and EMEA Retail, Paul Souber, says: “In the retail sector, the key for landlords and brands in 2017 will be about quality and getting your offer right.

“London remains a retailing powerhouse and we’re still seeing substantial continued interest from international brands to have a presence here. However, the cost of occupying shops and restaurants in London has generally increased significantly owing to the new levels of cost, the living wage, and increases to business rates, the introduction of which, could not have been timed worse.

“The Government needs to realise that London can be a golden goose in terms of tax revenues but there is a tipping point beyond which even the most successful commercial environments become untenable to businesses that must make profit to survive.

“We have a world-beating, high-quality retail and restaurant offer in London. In the light of economic uncertainty, we should be looking at ways of turbo-charging that environment, supporting our occupiers and not imposing archaic, unfair taxes. For example, allowing the business rates generated from London to be invested in London would enable the Capital to future proof itself and continue to power ahead as the world's leading Global City.”

Beyond London, Mark Phillipson, Head of Retail at Colliers International, comments: “The High Street continues to restructure with lettings being done at post-recession, re-based rental levels. However, the threat of persistent vacancy remains a very real problem for many High Streets with a major segment of properties now needing to find an alternative use to retail if they are to remain commercially productive.

“Occupier demand remains modest, but we’re now seeing more international brands spread out from their original presence in London, while online retailers are now spawning physical stores. We expect this trend to continue and be bolstered by further selective expansion by UK brands. Eating and drinking offers – in all their various forms from Michelin-starred restaurants to grab & go fast-food – are now a key driver in today’s retail mix and we expect them remain so in 2017.”

Hotels

Colliers forecasts that hotels will open their doors to more international visitors

“The UK hotel market is a consumer-driven real estate sector so its performance is closely linked to the overall general economy. With a few new supply-driven exceptions, the UK regional market will be supported by low interest rates, solid UK trading, acquisitive domestic buyers and an increasing flow of international capital attracted, in part, by cheap sterling,” said Julian Troup, Head of UK Hotels Agency at Colliers International.

Marc Finney, Head of Hotels & Resorts Consulting, adds: “The tipping point has now well and truly been breached for hotel development. Until relatively recently it was possible to buy an existing hotel cheaper than to build a new one. This is now very much in the past and we would expect to see a pick up in the pace of new hotel development throughout the UK.”

Debt matters

November’s CREFC Europe conference was perfectly placed to test the mood among the UK’s real estate finance sector, opening as it did a week after Donald Trump’s election as US President.

Reflecting on how the market had changed in 2016, Peter Cosmetatos, CEO, CREFC Europe, said: "I think there's a couple of separate things. One is the way certainly the prime real estate market more or less peaked over a year ago now, so transactional activity softened since then and pricing began to stabilise, having been feeling more and more aggressive through 2014 and 15. That's been compounded by the huge increase in known political uncertainty since the referendum was announced, through the build-up to the referendum and the result, and of course more recently with the election of Donald Trump to the US presidency. I think all of these factors together have clearly reduced the extent of activity in the market and I think a lot of people are feeling much more sensitive to risk and the market feels a lot more balanced.

"I think the important thing to recognise is that we're a long way from the situation of 2006-7-8. We don't have a hugely, over-leveraged market where people had forgotten that booms are followed by busts. I think the market feels quite resilient. It's much more diversified and it doesn't feel like it's on the brink of some sort of catastrophe, but it's certainly slowed and feels a lot more risk-averse."

There was consensus that there is an ever wider and more diverse number of sources of debt for investors from traditional lenders through to debt funds and insurers but that access to this is restricted often to established players with long-term relationships.

One borrower said: “For the relative start up this is quite a difficult time and you will definitely have to shop around.”

There was also a significant amount of debate around the growing importance of intermediaries in sourcing finance and their effectiveness.

There was consensus that they were both increasingly professional and effective but the lending community tended to see them as better at representing borrowers.

One senior lender said: “They serve a better purpose for the borrowers still" while another said that to be more relevant to lenders they needed to have systems in place which made them able to whittle down the target list to just 10 to 12 companies with mandates “rather than 300. It is three quarters of the way there to being fully mature.”

With regards to signs of the CMBS markets reviving in the UK and Europe there was agreement that there was appetite for CMBS if the right product was there. One senior banker said: “The problem remains with the supply of product where the loan can be priced such that it can still be profitable relative to how the balance sheet is underwritten.”

Other lenders pointed to the continued importance of Pfandbrief issuance for cheap financing of real estate transactions as evidence of appetite for CMBS issuance.

Major concerns included caution over the emerging regulatory capital requirements which some lenders suggested by trying to create a one size fits all regime will force some into taking on riskier business.

Some of the borrowers were clearly concerned that while LIBOR had stayed flat and the Bank of England was again pursuing a major quantitative easing programme to encourage lending, margins were still creeping up.

Lenders argued that banks were merely pricing in the added risk being seen in the current market.

Another hotly discussed issue was the progress or lack of on the Bank of England’s proposed loan database. There was general consensus around the conference centre that it is inevitable it will happen but the BoE will need to force it on banks and will need to ensure that all concerned are comfortable that definitions will not change for significant periods of time.

Others pointed out that the Bank of England only regulates a limited number of the large banks and that large numbers of alternative lenders sit outside of this and this will be difficult to regulate.

There was also debate over whether borrowers were prepared to pay a premium to secure financing from a single lender rather than a club. The consensus was that on certain more difficult assets with “a story to tell” than premiums of 10 to 50 basis points would be paid. Other borrowers suggested instead they should receive a discount to deal with a club.

There was also consensus that senior lending loan to values have dropped by about 5% to create a funding gap between 55% and 65%. That is creating opportunities for mezzanine providers but borrowers are also increasingly focused on raising preferred equity financing from their investors to replace seeking this mezzanine strip of the financing.

Focusing on the commercial real estate finance markets Savills’ Oakley says: “Debt will remain cheap but it will be more and more a case of the have and have nots with it becoming more difficult to source debt for some particularly at the opportunistic end and for development.”

Global flows

CBRE says there is “considerable uncertainty over what 2017 holds in store, in terms of both total investment turnover and the pattern of capital flows”.

It adds: “As a result of the growth of Chinese outflows, Asia has (just) overtaken North America as the largest source of global capital over the last four quarters. The gap is likely to expand in 2017 and may become a long-term fixture if outflows from Japan follow the expected pattern. Meanwhile, capital flows from the Middle East (US$21.4bn in Q4 2015-Q3 206) will continue to be important as the region's sovereign wealth funds remain eager to increase their real estate allocation and private investors are also keen on global real estate.

“In terms of global capital flows, we may see Chinese investors retract investment in USA because they are waiting for situation to develop between China and Trump’s America. Korean investors, however, are still investing in the USA, debt in particular but mainly in Europe still. Pan-Asian investors have European interest, especially in value-add and core plus property. They are also familiar and comfortable with the market.

“Overall, people are smarter in identifying risk and have learnt their lessons from the previous crisis. The world is more prudent.”

Scott Brown, global head of real Estate at Baring Real Estate Advisers, says a number of key themes have developed globally over the year.

“The fragile global recovery proved resilient through 2016 in the face of the surprising Brexit referendum, slowing growth in Europe and Asia and uncertainty leading into the US presidential elections. While the political environment remains fluid and adds uncertainty entering 2017, the slow growth, low interest rate outlook and favourable property market fundamentals throughout industrialised economies—bolstered by demographic, societal and technology-induced structural forces—set the stage for continued but varied improvement in local market performance and a relatively attractive outlook for property yields.

“However, at this stage of the cycle, amid lower expectations for price appreciation of core assets, we believe successful investment is less about broad macro trends and instead centres on submarket dynamics and asset specific characteristics. As a result, 2017 will be a year of “heightened selectivity,” during which successful investment will require local skill and expertise to execute the business plan at the asset level.”

Brown adds: “While Brexit temporarily dampened European property transactions volumes in the third quarter, top tier markets in the US and Europe continue to attract growing amounts of foreign capital, especially from Asian investors. Capital market support for the real estate asset class is expected to remain strong and reflect an expanding investor base and evolving appetite for real estate-related investment products.”

PGIM Real Estate predicts: “There is more political uncertainty to come in 2017. While there is a potential impact on occupier activity in countries holding votes, any impact usually fades quickly.

PGIM says occupiers will remain cautious while debt constraints will hold back development.

It adds that investors will continue to target major markets.

“The share of capital going to major markets remains elevated. The gap in occupier performance is narrowing, but we do not anticipate a significant rotation of capital away from major core markets in 2017.

It agrees with the view that focus will turn to income growth.

“Forecasts for rising bond yields point towards higher required returns for real estate. Investors will increasingly be on the lookout for income growth and we anticipate growing interest in value-add strategies.”

Business rates hangover

One final issue that will undoubtedly continue to dominate the market’s thoughts is the business rates revaluation.

Over half of property directors believe that the current rates revaluation will force companies out of business, according to a recent survey organised by Avison Young at the recent Property Directors Forum.

Attendees at the event were asked to provide their thoughts on a number of topics affecting the property industry. The majority of respondents considered that the rating revaluation would result in some big changes to the sector with expectations of business closures, relocations, growth of online and the death knell for some town centres.

Almost a quarter of the respondents (22%) said that they would be changing their own property plans as a result of the rates revaluation and that their plans would include consolidation and agile working. Over half of the property directors surveyed said that they had not yet registered a business rates appeal.

Avison Young’s Jason Sibthorpe said: “What is made crystal clear by this survey is that the business rates revaluation is a major issue with occupiers, to the extent that it is having a material effect on prospects for companies up and down the country.

“The survey of property directors also revealed that the chancellor’s Autumn Statement is expected to have very little impact and that businesses are waiting for the impact of Brexit negotiations. 82% of the respondents predicted a tough year ahead – with 27% of them saying that it would be ‘significantly so’.

“Almost three times as many property directors thought that Brexit will cause a decrease in demand for commercial property in the UK than those that expect an increase.”

pnorman@costar.co.uk

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