UK property can expect returns of just 1.1% next year before a rebound in 2018, according to CBRE’s 2017 Real Estate Outlook report.
Income will become the main driver of total returns following capital value falls in the months after the referendum, the report said. As capital value growth recovers, total returns are expected to reach 6-7% in 2018.
A backdrop of rising inflation and bond yields, Brexit negotiations and 2.1% GDP growth going into 2017 mean the UK economy has both strong fundamentals and risks in the coming year.
However, property is expected to be “less embattled”, CBRE said.
The industrial sector will likely have another strong year in 2017 as e-commerce continues to revolutionise retail and create further demand, according to the report.
Slowing employment growth will lead to a slowdown of rental growth. Occupiers in financial services will be the most exposed to Brexit, but many areas have balanced the risk with occupiers from other industries.
The report added that overseas appetite for UK property is likely to stay strong, although CBRE expected investment to slow in 2017 before recovering in 2018.
Miles Gibson, head of UK research at CBRE, said: “2017 will be anything but boring. Political and economic pressures will put the property industry under pressure to perform next year.
“Although the demand side will unquestionably be a little weaker, supply shortages in many sectors, non-cyclical drivers in others, risk premiums that still look attractive, a general flight to safety and the structural attractiveness of the UK, all add up to an ability to continue performing under severe external pressure.”
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