The General Election in May is probably the hardest to call in a generation.
Due to the influence of smaller parties and lack of dominant leadership, I would not be surprised to see another coalition. The risk of a referendum on EU membership from the Conservatives or a mansion tax from Labour means that an outright win for either party will bring potential risk and change for business. This uncertainty will lead to a pause in decision making, particularly from occupiers, in the run-up to May.
This year we believe people will feel a return to growth as low inflation combined with improved GDP will finally produce real wage growth and an increase in disposable income. This will ensure a relatively positive sentiment is maintained and will be reflected in the investment markets. The weight of money still looking to find a home in UK real estate will remain, and should result in another strong year for transaction volumes.
The challenge for the property industry in 2015 and beyond is twofold: a skills shortage, which should be addressed through widening recruitment drives and forging stronger partnerships with schools to ensure a more diverse range of people join the industry; and the rising costs of construction, in terms of materials and labour, which will make development and regeneration even harder.
Offices
We are seeing a lack of modern office supply just as surging employment growth and urbanisation drives demand. This will lead to a rise in prime rents, but only where landlords meet the changing needs of businesses. There is a new focus from occupiers on the link between workplace, people and productivity. Investors who create spaces that inspire and encourage innovation will benefit from higher rents. Refurbishments will become more prevalent to deal with immediate demand.
Retail
Demand from overseas investors for prime retail in London and the regions will continue. Asian investors will start looking to secondary UK retail for yield performance, but we still see a lot of challenged secondary space due to very limited tenant demand and the requirement for significant capex and transformation. Convenience stores could become the new prime.
We will continue to put pressure on the government to introduce more frequent revaluations and a complete modernisation of the business rates system. Because government wants this system to remain fiscally neutral, it may not deliver fundamental changes, but it will shift the balance of payment from north to south, which will ease the pressure on some northern retail locations in the medium term.
Capital markets
New capital will continue to arrive in the UK, putting particular pressure on London real estate. New York and Hong Kong are experiencing the same effect, with strong appetite from Asian pension funds and US private equity continuing to drive down yields. We expect UK investment volumes to reach similarly high levels to 2014, but the rate of increase could soften due to lack of supply. As the year progresses we expect to see UK institutions becoming net sellers in their core capital, taking their profits and reinvesting in higher-yielding markets in the regions and alternative sectors.
Residential
The supply conundrum will remain the overriding challenge for the housing industry. We will continue to be in a period of cross-party resolve to tackle the growing housing crisis, which will undoubtedly take centre stage in the run-up to the election. Build cost inflation is still a major barrier to more supply, and some areas will see medium-term above-inflation price growth. Sustainability is becoming more recognised as central to resilient longer-term business models for investors and occupiers. This used to be just about operating costs, but now the focus is more about consumer needs and brand proposition.
We predict a UK house price increase of 4% for 2015, but this certainly does not tell the whole story.
Guy Grainger is UK chief executive at JLL
