2017 has been something of a Curate’s egg for the UK and European real estate markets and 2018 is looking no different. Political events and mega-trends will continue to be the key influences for investment decisions and many are viewing 2018 as a pivotal year in the cycle.
There’s no doubt that people around the world are voting for change. In the UK, Brexit has affected the real estate industry not least because investors remain concerned about political instability and its potential to derail the economy. Against this backdrop, in 2018 I expect we will continue to see investment committees taking a cautious approach across the market, deploying capital selectively and strategically.
The fog will start to clear on our future relationship with the European Union enabling investors and lenders to get visibility on what the landscape is going to look like in 2019 and beyond.
In terms of the active investors, sovereign wealth and family office investors will continue to place their capital in core and core-plus assets and long-term secure positions and so a flight to security is not stopping any time soon. The core London market remains attractive to Asian and Middle Eastern investors and we have seen that in abundance in 2017. We will continue to see Middle Eastern and Asian high-net worth investors investing in London, placing their capital in an international safe haven with a recognized rule of law. Those high-net worth buyers see the current currency arbitrage and view Brexit as a political rather than an economic event.
Looking at the broader landscape both in the UK and Europe, technology, our lifestyles and our behavioral patterns are affecting real estate like never before. The focus will likely be on the way we live and the way we work, driven by urbanization, technology and our ageing population. I expect co-working spaces, the private rented sector, logistics and senior living to feature high on the agenda in 2018 as investors back long term demographic trends. This will definitely favor those investors with a long term horizon, so funds at the beginning of their investment program and our sovereign wealth clients have a competitive advantage.
Residential investment in build to rent will continue on its trajectory as a major investment product. As urbanization brings more young people to our towns and cities, I expect 2018 will see redundant retail and office assets being repositioned as residential schemes with real direction coming from thoughtful planning policy and continued government financial support, focused on the development stage of projects. The appetite for the stabilized private rented product is now very well established and there is real political and investor appetite to solve the housing crisis in the UK. I hope we will see a government-led policy shift as a catalyst for change, which may or may not be the case when the government is otherwise distracted by Brexit.
In terms of real estate lending, as banks become increasingly restricted by capital requirements and regulation, they are struggling to keep pace as effective and competitive lenders to the real estate market. In 2018, we are likely to continue to see a number of deals, particularly development projects, being funded by alternative lenders, by equity and through forward financings. It is definitely the era of the equity investor and alternative lenders. The question is – can the banks fight back?
Our opportunistic clients hope to see more distress in 2018. This is polarized by assets dependent on discretionary spending, for example retail and casual dining. It will be interesting to see what happens in 2018 to those sectors, particularly those assets in secondary locations. Expect some repositioning and possible distress whilst other sectors, such as logistics, are likely to continue to be net beneficiaries of their decline as technology, our lifestyles and behavioral patterns drive their success.
2018 will be a significant year for many reasons. The fog will start to clear on our future relationship with the European Union enabling investors and lenders to get visibility on what the landscape is going to look like in 2019 and beyond.