Investors are focusing on income

The start of the year is quiet as expected in the UK market as uncertainty over Brexit persists, but things will soon return to normal after a slow Q1, according to Fidelity International.

‘We expect there will be an agreement and no falling off a cliff, but undoubtedly there will be question marks until Brexit is resolved, but we see no risk to occupational demand or a big shock to rents in the short term and that should help protect performance in 2019,’ said Kim Politzer, director, head of research, European Real Estate, Fidelity International. ‘The first quarter of the year is likely to be quiet, but then activity will pick up.’

Retail is the biggest challenge for the UK market and continuing falls in values are to be expected in the sector in the next 12 to 24 months.

‘Fidelity International’s forecast is that the price of UK retail assets could fall by up to 70%,’ said Politzer. ‘Retailers cannot afford the rent at the moment, profitability has been squeezed by increases in the minimum wage and business rates, so we need to see significant changes in pricing.’

The risk, she said, is that ‘this trend could spill from the UK into Europe, which is why we are bearish and underweight in retail.’

Looking at the EU market in general the themes are similar to the UK market on the sectoral side, she said: ‘Retail will be quiet, there is a strong demand for logistics across the European markets and everyone is acutely aware that we are late cycle’.

Everyone mentions the late cycle, but this awareness does not stop investments. ‘Investors now want assets that deliver a long stable income for when the downturn eventually comes,’ said Politzer. ‘The real focus will be about income, making sure that assets that are acquired or are being actively managed are going to deliver a long stable income stream so you are protected when the correction in the market comes, be in 24 or 26 months’ time.’

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