I attended the IPF/ SPR seminar on the outlook for UK property earlier in the week, where I heard three interesting presenters outline a fairly consistently conservative approach to the prospects for 2018. This caution was largely borne out of a recognition that global monetary liquidity will tighten further this year as the UK follows the US in raising interest rates; the lack of clarity around the terms of trade of any Brexit deal and the possibly detrimental effect on demand of the introduction of capital gains tax on overseas investment entities.
Tony Brown of M&G Real Estate showed some forecast returns (I’m not sure if they were IPF consensus returns or M&G’s own) which appeared to show a flat profile of returns in the 4% to 5% range over the next four years or so.
For our part we are a bit more bullish at least in the short term. We are not expecting any capital value loss this year and expect the all property total return to be around 7%. Our optimism stems from the following reasons:
- A lack of confidence to invest has affected development activity which is limiting the supply of space. This is helping underpin some, albeit modest, rental growth.
- The introduction of capital controls in China is unlikely to stall the globalization of UK property which in an international context, in an uncertain world, remains an attractive proposition. The capital gain obligation only restores the UK to parity with most other markets.
- Although interest rates are rising and Q.E has concluded in the UK and US, the ECB and Bank of Japan continue to maintain a robust level of monetary liquidity. Debt also remains cheap.
For these reasons we expect another good year for returns. However we note that historic return profiles are more roller coaster than flat line and believe we will at some point encounter a sharp dip in returns. However, at the moment we remain optimistic.
Chief Investment Officer, KFIM
11th January 2018