At the beginning of 2015 we were looking ahead to a year of change, anticipating political upheaval after the general election. Fears of an uncertain result or a weak rainbow coalition didn’t come to pass, obviously, but there is now a much larger debate looming: the UK’s relationship with the EU.
With recent polls showing the public split 50/50 on staying in or leaving, it will become even more important for British business to be arguing for continued membership. My views are clear: the UK will be best placed to prosper as part of a reformed EU that encourages growth and productivity.
The most important theme across our 2016 sector predictions is the impact that skills shortages are having on growth, from constraints on construction volumes, to technology and productivity. The EU gives us access to a continent-wide market for labour and skills as well as trade and business benefits.
While construction levels are bouncing back from post-recession levels, supply chain challenges will continue to increase lead-in times for projects. As construction forecasts remain strong and stretch the ability of the market to deliver, robust portfolio and project capital planning will be increasingly critical to businesses.
This year will be more balanced than 2015 in terms of real estate investment and property values It is now all about rent, not yield. Over the past 24 months the weight of money that has come into the market has compressed yields and made some sub-sectors look very keenly priced. Investors will start to rebalance their portfolio towards sectors likely to see stronger rental growth. We also expect a slight pause in investment volumes during the summer, assuming we get an EU referendum in Q3. Despite this, the UK real estate market will remain the second most traded in the world.
The coming year will see further convergence of HR and real estate strategies as access to talent becomes the main driver of office leasing. Better technology will mean data and analytics become more prevalent in property, helping to support flexible and mobile working, and increasing space efficiency and productivity.
In the London office market, very low levels of supply have driven sharp rental growth, particularly in the second half of 2015. The spectre of rising business rates will combine with concerns over rental costs to affect location decisions. Cost-conscious central London occupiers will begin to consider outer locations such as Canary Wharf, Paddington or West London to address concerns over rapidly rising occupational costs, particularly as the Crossrail opening is getting ever closer.
In the retail market, 2016 will be the year in which the true Millennials come of age. This will have a long-term impact on the sector as retailers innovate and upskill to attract and foster loyalty among younger shoppers. Their expectations of a seamless, personalised and mobile service will transform the way retail property functions in the UK. This will continue to affect the logistics and distribution sector, which is changing at the fastest pace.
Despite the most supportive policy environment in a generation for housing delivery, it is doubtful that anywhere near the necessary 250,000 homes needed each year will be achieved. This has less to do with planning policy and more to do with market capacity. Government policies such as Help to Buy and the starter home regime are laudable; however, there is a risk that this narrow policy focus will create a new divide to replace the North/South: those who do or do not qualify for home-ownership programmes.
Finally, London is in for an interesting year with the mayoral elections in May. The new mayor will need to focus on creating a city for people with less traffic, better trains, improved air quality, first-class retail and leisure amenities, as well as tackling the capital’s housing issues. With devolution firmly on the agenda, London has the potential to be a smart city blueprint for the rest of the UK and the world.
