FULL REPORT
Last year, the UK witnessed numerous failed Brexit deal votes, countless referendum promises, leadership races and a General Election, which resulted in a Conservative majority. The largest for the Conservatives since 1987 and providing a bit more stability to the markets. This will end the prolonged parliamentary deadlock and bring much needed relief to businesses and investors, laying the foundations for modest growth in 2020. However, while we have some clarity, a number of unknowns still exist.
With the Withdrawal Agreement signed on 24 January
January, the UK will leave the EU on 31 January 2020, after 47 years of membership. The next task for the Government will be to secure a trade agreement by the end of the transition period (December 2020) with June the final month to request an extension of the transition period, which PM Johnson has said he will not to do.
In the short term, the focus will turn to the Budget on 11 March to boost growth and detail how the Government will deliver the pledge to lift investment spending to 3% of GDP per year, more than double over the past 40 years.
2019 was a challenging year for the investment market in the UK. Brexit and economic worries, along with continuing structural problems in retail, persuaded many investors to postpone decisions and wait for clarity. Almost all sectors saw a drop in activity to below-average levels. Offices recorded the biggest drop (-27%) to finish 2019 at 10% below its 10-year average, and Central London volume declined by almost a third. Retail, at just under £5.0bn, recorded its lowest annual volume on record, and shopping centre investment fell below £1.0bn for the first time in the last 20 years.
It wasn’t all bad news, however. After a quiet three quarters, Central London quarterly volume doubled in Q4. Alternatives and Leisure recorded a 5% annual increase to reach £18.5bn, and have now undoubtedly established themselves as mainstream asset classes. The "Beds" sectors (Student Housing, Hotel and PRS/BTR) took a market share of 25% last year - more than Industrial and Retail combined. Prime Central London homes also ended the year well, with an annual increase in transaction sales of 12% on 2018. This was largely driven by Q4 transactions being the highest seen since Q1 2016.
2019 was a challenging environment for investors. Despite considerable pent-up demand for prime assets, a lack of stock frustrated many investors looking to deploy capital into an occupational market that remained robust in the face of political and economic adversity.
However, it was a strong end to the year. In Central London, annual volume was down 27%, but the election result helped push almost £2.0bn of deals over the line before year-end. Investors finally received some much-needed clarity, and I expect investment activity to continue to pick up in 2020.
The leasing market continues to remain positive. Void rates are below-average, rental growth has been positive (3.7% in the City last year), and 50% of the 7.7m sq ft of the new office schemes due to complete in 2020 are already pre-let. Moreover, the UK continues to show good value in relation to its European neighbours. While the London City prime office yield was stable at 4.00% last year, Paris and Frankfurt ended 2019 on 2.80%. This will ensure investors remain focused on the London market, which will in turn encourage yield compression. All in all, we expect a significant weight of capital to continue to target London and the UK as a whole this year.
The end to the parliamentary deadlock will bring some much needed relief, lifting both consumer and business sentiment providing the extra boost to growth.
Government's pledge to lift investment spending to 3% of GDP per year would be more than double over the past 40 years. Regional re-balancing looks set to be a key policy objective. The GBP100bn ‒ if fully allocated to this programme is more generous than we have seen in the past. But we will have to wait to see what is in the Budget.
Sustainable boost to economic growth will be largely dependent on whether certainty is upheld and a trade deal is on course to be signed by the end of the year.
Investment volume and capital value growth will edge upwards thanks to increased political clarity. However, slow progress on a UK-EU trade agreement will mean uncertainty intensifies as we approach the deadline. Nevertheless, ongoing global economic uncertainty and concerns over trade tariffs will sustain global demand for “safe havens” markets such as the UK and London.
At the same time, the planned investment into regional infrastructure could help unlock new development and fuel increased investment in the Big 6 and other regional centres, while also boosting economic productivity outside London.