Predicting the unpredictable

It’s the first full working week of 2017 and property professionals have gathered to hear forecasts about the year ahead. Some were more optimistic than others.

Earlier this week, JLL held its annual crystal ball-gazing event – UK Property Predictions – in London. Real estate people turned up en masse, eager for light to be shone on the way ahead. UK chief executive Chris Ireland kicked off with a run-down of what JLL got right this time last year.

“We did predict that investment volumes would decline and that returns would come off a bit,” he said, before admitting that some of the bigger picture had been missed.

The UK’s vote for Brexit, a new British prime minister and Donald Trump’s ascendency to the White House were not within JLL’s 2016 tips. A show of hands at the January 2016 event revealed that around 80 percent of the room expected a ‘remain’ vote in the referendum, Ireland reminded this year’s attendees.

Indeed, as JLL’s head of UK research Jon Neale joked, if he had stood on stage last January and correctly predicted the year’s key geopolitical events, he probably wouldn’t have been standing on the stage for the 2017 event, so outlandish did they seem at the time.

Although the tumultuous times we live in make the future extremely difficult to predict, there was plenty for property finance specialists to mull over.

“This year will be dominated by the fall-out from last year,” said JLL’s Ireland, outlining three main trends.

Firstly, with Article 50 due to be triggered by the end of March, Brexit uncertainty will continue throughout the year, although investors will become more used to it. Secondly, the UK economy will continue to outperform the majority of the developed nations, including continental Europe’s largest economies. Thirdly, the second half of 2017 will see rising inflation, which will lead to talk of an interest rate increase sooner than expected.

So, according to JLL, the effect of all that will be a modest increase in investment volumes to £50 billion ($61 billion; €57.6 billion) from last year’s £45 billion. The flight to prime will persist, with the weak pound continuing to attract overseas investors, although those brave enough to look to the secondary market will find robust occupational demand.

Less positive, inflation will hit the sector, not least in terms of development, with construction costs likely to rise.

At another London event this week, the European Public Real Estate Association’s annual ‘insight’ event, there were more words of caution. The event was held against a backdrop of recent poor performance by UK REITs; the EPRA UK benchmark for last year was minus 21 percent return.

Speaking first, Morgan Stanley real estate analyst Bart Gysens said that City of London vacancy rates could soon be up to 2009 levels, with office rents falling (between 10 and 25 percent). Retail’s outlook isn’t much brighter, he added, with sterling’s weakness importing a lot of inflation. UK property stocks, he said, showed “quite a bearish scenario”.

There is also “bond yield anxiety” as investors wonder whether they should be worried about the rise in 10-year bond yields, Gysens added.

Hammerson CEO David Atkins attempted to raise the mood by highlighting forecasts of GDP growth in Europe of circa 1.5-2 percent, unexciting but “growth nonetheless, and we can still make decent returns”. Simon Robson Brown, portfolio manager at CBRE Clarion Securities admitted that the prospect of stagflation keeps him awake at night. Property can outperform a rising bond market only if growth rises. “We could turn into a bond proxy if we don’t see growth,” he added.

While some of this week’s property predictions were gloomier than others, most agree that 2017 will be a year of challenges, during which the resilience of the UK and Europe’s property markets will be tested.