Industrial (5.1%) and offices (6.5%) had much more respectable years, with offices even seeing some capital growth. 2020 will be a different case entirely, predicts JLL. Although there will still be real difficulties in the retail sector, the worst falls in value are behind us, and total returns are forecast at 2.3%. With industrial expected to see another strong year (9.0%) this will push total returns into positive territory again.
While the 5.8% forecast for this year may seem moderate compared to a few years ago, it remains respectable in a low-yielding, politically turbulent world. There are risks to the upside if the economic bounce following the election and Brexit is strong and long-lasting – but this has to be set against other headwinds, not least the limited room for capital growth given where yields now are. Financing and diversification will be increasingly important in driving returns. With total returns more modest than a few years ago, innovative financing solutions will continue to offer a point of difference to those investors applying sophisticated debt and hedging strategies across their portfolios.
Debt funds are also increasingly popular among many institutional investors and fund managers as they look to diversify across the full risk spectrum and gain indirect exposure to assets or portfolios outside their own direct holdings. These funds will provide reliable income streams as the market continues to attract higher-leverage buyers such as US private equity and Asia-Pacific property companies.
Discipline will of course remain essential from both a borrower and lender perspective, but overall debt levels appear manageable across the market and there do not seem to be concerns around overleveraging as seen in the previous cycle. Meanwhile, funds will continue to diversify their exposure to real estate through a variety of means – from debt funds, emerging sectors and operational property to infrastructure and income strips.
Chris Ireland, JLL UK CEO, explains:
“The UK market is likely to recover somewhat in the first half of 2020, following a tumultuous 2019 which gave the country a lot of political uncertainty. We can expect investors to become more confident following the Conservative victory and the likely passing of Boris Johnson’s Brexit deal. However, caution is likely to grow as the year progresses and the new ‘cliff edge’ of a December 2020 deal becomes visible. Businesses will continue to become more focused on the climate emergency and tackling, while a new emphasis on social value and purpose will come to the forefront in 2020.”