Where will growth come from for the real estate sector?

In 2016 the sector paused and reflected. Transaction levels initially fell amid concerns that asset values could stall. The shock of the EU referendum result and major policy changes to business rates and the tax regime only added to the uncertainty.

The outlook for 2017 remains uncertain and confidence continues to be a significant threat to the sector. Investors and developers now look at investments with more scrutiny than ever before. When considering buying options, many are now turning their attention to income levels, not capital growth.

Low UK interest rates continue to make debt financing cheaper than previous economic cycles. A lack of good quality, available properties in the market is driving demand and pricing upwards, however. Interestingly, more than 70 per cent of respondents from RSM’s Beyond 2016 survey felt the cost of borrowing would remain stable over the next 12 months.

While mainstream debt solutions remain popular, many investors are looking at alternative sources of finance including private equity and crowd funding solutions. Could real estate borrowing be ready for some disruption?

The financial press is now recognising the significant challenges business rates hikes, the national living wage increase and foreign currency volatility are having on occupiers. These cost headwinds will impact the majority of occupiers, but retailers, pubs, bars and restaurants will be hit hardest. All these issues will put downward pressure on rent and related property values for investors.

Top regional cities continue to be a focus for investors seeking to improve yields and create value. The UK government’s commitment to major infrastructure projects, such as HS2 and Crossrail, is driving regional growth. The South East, North West and South West are considered key areas to generate value. While international investors still see London as a safe haven, other investors see infrastructure schemes as an opportunity to piggy-back national projects. This is one trend likely to continue.

Alternative real estate sectors are becoming increasingly popular with property investors. Over the past two years student housing, healthcare and industrial investment have been seen as viable alternatives for growth. Changing consumer and occupier habits have led these changes. The growth in click and collect along with same day or next day delivery means traditional businesses now need hubs in well-connected locations to meet changing customer needs.

So where does this leave us? The real estate market in the UK still holds many opportunities for income and capital growth. Cost headwinds are facing occupiers which as a result are putting pressure upon rental levels. Investors are becoming more sophisticated in their research and decision making. Niche segments of the market are becoming more important for investors who are looking to diversify their risk from single asset classes in order to generate sustainable growth for shareholders.