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UBS: central London office rental growth forecast flipped back positive

In its Real Estate Outlook report, UBS explains that yields are ultimately flat in the short-term, “however we would note there is some upside risk to this assumption should a deal be reached with the EU by 31 October,” says Zachary Gauge, European Real Estate Analyst, UBS-AM Real Estate and Private Markets.

Under this scenario, UBS suggests a significant inflow of foreign capital coming back into the Central London market. Domestic players continue to focus on the South East and Rest of UK markets where supply conditions are favorable and modest rental growth is forecast. This is expected to drive small increases in rental levels over the next five years. Across all markets we would continue to expect stronger rental growth to come through in the prime segment reflecting the relatively weak levels of construction, and competition from serviced offices affecting smaller secondary assets.

The main shift in UBS’ office forecast over the past six months has been a change in its short-term expectations for Central London rental growth. We had originally been factoring a modest decline of -3% and -2% in the City and West End respectively in 2019/20. However, as the occupational market has continued to exceed expectations, we have revised these to a positive 1.1% and 1.9% for the same period, with a similar profile of moderate increases thereafter.

Retail market outlook

UBS forecasts a further 8% decline in retail rents out to 2021, with variations by region and sector, as headwinds do not let up.

Sean Rymell, European Real Estate Analyst, UBS-AM Real Estate and Private Markets, explains:

“We expect there to still be fairly robust demand for food stores, which have already undergone something of a correction. In line with the weakening occupier outlook, we are expecting outward yield shift of around 60 bps over the next three years, again with significant variation based on sector and region. We do expect that, at some stage, the market will begin to improve as and when the sector has fully adjusted to structural changes affecting it. However, we feel this lies beyond 2021.”

Logistics market outlook

UBS forecasts pricing in the logistics sector to peak in 2019 and yields to stabilise, after significant yield compression over the past few years.

UBS says its forecast is driven by the record low levels assets have reached “as pretty much all investor types have been scrambling to buy UK industrial over the past few years”, explains Sean Rymell, European Real Estate Analyst, UBS-AM Real Estate and Private Markets, adding:

“In light of this, we are expecting moderate yield expansion of around 10 bps to 2021. However, rental growth is expected to remain positive, albeit moderating from the very high levels seen over the past five years, particularly in the South East and London where affordability is becoming more of a concern.”

james.wallace@realassetmedia.com