The Conservative Party’s election success in December removed one of the key risk factors holding back the UK economy and investor confidence. For some overseas investors, the prospect of a far-left government was a greater inhibiting factor than Brexit.
Boris Johnson’s new government can now move forward with Brexit negotiations. However, by enshrining in law that Brexit is to be achieved by the end of 2020, the risk of a hard Brexit remains real. This may continue to weigh on business and investor confidence this year.
Within the Conservative manifesto, the significant pledges to spend on infrastructure – focused in the regions – is of particular interest to the property industry. This investment will be a catalyst for economic growth, and will benefit several locations.
The government has allocated £100bn to an infrastructure fund, of which £22bn has been committed to improving flood defences and filling potholes. Chancellor Sajid Javid is undertaking a review of the country’s infrastructure requirements and these will be set out in a budget in the latter half of the first quarter.
Road and rail
However, recent comments made by the prime minister suggest road and rail projects in the north of England and Midlands will be the priorities. Specific projects likely to secure funding include the Northern Powerhouse Rail, starting with a new line from Manchester to Leeds; the Midlands Rail Hub, which will strengthen rail links between cities across this region; and the rollout of gigabit broadband to every home and business by 2025.
Other planned initiatives include regional funding to upgrade bus, train and tram services, and £1bn to complete a fast charging network for electric vehicles.
The outlook for HS2 remains unclear, although Boris Johnson has indicated he is inclined to find a way to complete the project. However, there is no manifesto commitment, and its future will depend upon the findings of the Oakervee review into costs and timings.
Infrastructure winners
These projects will alter demand for real estate, boosting the rental growth potential in many locations but lowering performance elsewhere. For this reason, infrastructure is a key theme within Mayfair Capital’s investment framework, which guides our investment selection.
Understanding the relative winners from infrastructure investment will be critical to delivering outperformance.
Against this background, the expectation of modest economic growth, both globally and in the UK, means the low interest rate environment is set to continue. This should be favourable for property. While prime yields have probably run their course in anticipation of rental growth, we do expect yield compression for offices in London as international capital comes off the fence.
Equally, there is growing evidence UK domestic institutions are poised to re-enter the London market. For international investors, a 4-4.5% yield in London compares favourably with 3% or below available for offices in France and Germany.
One negative for the property sector may be rising cost inflation in the construction sector, which may adversely affect scheme profitability.
Markets can sometimes overcorrect. In 2019, all retail was ‘tarred with the same brush’. Retail warehousing with a strong convenience or value offer became caught in the downdraught of sentiment – and yet this segment of the market has tangible tenant demand.
The current high yields are beginning to look more attractive, while for value-add investors, the prospect of asset repositioning to logistics is becoming an interesting play.
Logistics should continue to be attractive as a Brexit beneficiary, while industrials may be held back by political uncertainty. The car industry will also continue to feel the pressure of the emissions scandal and now the highly important focus on climate change.
ESG will continue to rise in importance in every aspect of the property industry – from manager selection through to investor process and asset management.
James Thornton is chief executive at Mayfair Capital
