UK real estate has had an exceptional year in 2014 and the headlines have highlighted that phenomenal performance, with total returns reaching their highest level in more than 20 years.
Behind this we have seen some fascinating developments. These include a wave of new investors, a rapidly changing occupier market driven by technological disruption, economic shocks – both positive and negative – the twists and turns of new regulation and real signs of increasing M&A activity, to name but a few.
Given all this excitement it is perhaps unsurprising that the consensus envisages a moderation in performance in 2015, but our view is that this cycle has further to run.
We are confident the UK economy will show reasonable growth, even if the pace will be more measured than last year. This will provide a solid foundation for another year of robust performance, with rental growth and further yield compression driving returns.
Certainly we do not see any signs of a let-up in demand from the wide range of investor groups targeting UK real estate. Among those increasingly active in the UK we single out ultra-high net worth individuals as the ones to watch in 2015. Having quietly built their share of investment transactions to a sizeable level, family offices now represent a significant force.
With so much competition for UK property, some investors will inevitably find it difficult to deploy capital quickly and efficiently. Those with large allocations to UK property may decide that it would be easier to purchase an existing investment vehicle, with a management team in place, and so we will also be on the lookout for further real estate M&A activity in 2015.
Like many, we still have concerns over particular parts of the market.
Alarm bells are ringing for superstores – the race for space has left some retailers overexposed to large, out-of-town sites at a time when the consumer appetite for convenience increasingly favours the high street, and discounters are stealing a march.
We expect that a continued rise in small, frequent shopping trips will support convenient locations that form part of people’s daily transport routes: local high streets, stations and other major transport hubs will become the ultimate convenience pitches.
We have also been watching the results of bank stress-testing and the European Central Bank’s asset quality review in Europe with interest, as we question whether the more onerous reporting and capital requirements coming into effect could ultimately impact banks’ willingness to lend to property.
If this proves to be the case, we can see opportunities for others, including private equity, to increase their presence.
We do not see the office sector escaping the tech revolution that is rapidly transforming both retail and industrial.
Our recent research has highlighted the potential for a third of UK jobs to be automated, and that future employment growth will be focused on more cerebral, creative and collaborative jobs. The current regimented style of office accommodation will not be the best fit for these employees, who benefit from being able to work in a variety of spaces depending on the task at hand.
Office design is starting to respond to some of these needs, but it is becoming increasingly apparent that creating high-quality working environments requires the close collaboration of a company’s talent, technology, location and building strategies. Most organisations won’t see this integration completed in 2015, but they will recognise that the office is a hugely valuable component in their overall offer to staff.
Last, but by no means least, May will of course bring the added uncertainty of a general election.
So as we look to what 2015 has in store, one thing is for sure: it looks set to be another dynamic year, where success will be measured by the ability to navigate through this fast-changing world.
Anthony Duggan is a partner at Deloitte Real Estate
