LOOK AHEAD 2018: Softer Brexit, softer landing

Against a backdrop of progress in EU exit negotiations, the UK market will present plenty of opportunities for real estate lenders, writes Mark Bladon of Investec Structured Property Finance.

Without wishing to blurt out famous last words, it feels like we will see a move towards a softer Brexit during the year ahead, and that creates a more stable environment for real estate lenders in the UK.

If stage one of the rather painful EU negotiation process is anything to go by in terms of what the UK has agreed with Brussels, I believe in 2018 it will become more apparent to the public that if we want to avoid the economic instability of a hard Brexit, we will need some sort of trade deal with the EU which will be on their terms.

This should lead to a softer Brexit, which, in turn, should lead to a stronger pound – something that is likely to help keep inflation in check and, as a result, the Bank of England may feel comfortable slowing down any substantial interest rate rises. This could mean a softer landing for the economy and property in general, following a six-year recovery from the global financial crisis.

Sector-wise, we are likely to see a continued shift from retail to logistics as technology makes online ordering easier and cheaper for consumers. This will have a corresponding effect on rents and yields, with modest rent rises and yield compression for logistics, while the opposite could happen across swathes of retail property. This should throw up some interesting opportunities for developers to reposition retail as more leisure or destination offerings, or, at a more extreme level, a wholesale redevelopment of assets to uses such as new offices or residential. At Investec, we have already seen these opportunities materialise and expect to provide further funding in this area.

I expect slower rental growth in the purpose-built student accommodation market as the sector digests the continued delivery of new schemes in what is becoming a well-supplied market. However, by contrast, I expect global institutional demand for well-let, well-spread student portfolios to continue to be strong, as the PBSA sector remains one of the few real estate sub-sectors that can deliver immediate scale with assets where the income has a quasi-link to inflation through the annual resetting of rents. In addition, there is a huge amount of equity looking for a home; this should lead to mild yield compression, or at the very least stable yields. As always, lenders need to ensure they are backing experienced and well-capitalised developers to avoid being caught with unviable schemes.

It is hard to see how there is going to be any growth in the residential market above the £1 million (€1.1 million) mark due to the punitive stamp duty charge at this level. Given this covers a significant portion of homes in London and the South East, I would expect to see continued downward pressure on values above £1 million, and a corresponding effect on land prices in locations where units are valued in this range.

Overall, across the various segments of the UK real estate market, 2018 will be a year of opportunity, although there are notable areas of caution to consider. Good luck navigating it.