From Brexit bullishness to the rise of WeWork and a move away from traditional assets, property experts reveal the trends influencing the future of the industry.
MIPIM 2018 in Cannes was an upbeat affair, with property experts from across the globe speculating that the bull run initiated in 2012 has a couple more years to run, given that the UK and continental markets are all experiencing a burst of confidence based on the global economic recovery.
And with tax cuts in the United States expected to boost liquidity, the Eurozone back on the path to growth and Britain surpassing projections by recording nearly 2 percent real GDP growth in 2017, the vital component of strong economic activity is now in place across all key property markets.
According to Knight Frank research released at MIPIM, European commercial property investment hit €231 billion in 2017 after transactions worth €80.7 billion were recorded in the fourth quarter of the year – an 8.4 percent increase on the same period a year before. Amid this generally optimistic atmosphere, here are 10 key property market trends gleaned from MIPIM 2018:
1. Brexit bullishness
Whereas MIPIM 2017 had an air of despondency after Britain’s 2016 vote to leave the European Union, this year delegates had reached the ‘Keep Calm and Carry On’ stage. International investors in particular are no longer worried about Brexit, believing Britain is bound to strike a last-minute compromise deal with the EU. Some investors even see Brexit as a buying opportunity, believing regional office property in particular will become ‘oversold’ in the build-up to the March 2019 departure date.
2. We’re at a late stage in the property cycle
Everyone concedes that we are late in the property cycle, and it’s interesting that most property upswings conclude at the end of the decade. Think the 1980s, 1990s (before the September 11 attacks) and 2008 before the global financial crisis.
The view is that with interest rates rising to counter inflation and a tightening labour market, there will be further stock market corrections of the type already seen this year, shaking corporate nerves.
However, there was a strong feeling overall that the punch bowl won’t be taken away just yet, and that 2018 at least will show continued good returns.
3. Retail under pressure
Higher interest rates will, however, hit consumer spending, and there was a collective view at MIPIM that retail property will come under increasing pressure, with growing voids. The biggest and best-located shopping malls are expected to continue to thrive, and there is a growing school of thought in support of ‘community centres’ filled by shops servicing people’s needs — such as chemists, groceries and even G.P. surgeries. However, poorly located shopping centres, high streets with weak footfall and retail parks that are becoming moribund (with only the prospect of conversion to urban logistics or homes) are expected to face a less optimistic future.
That said, delegates operating in the London office market were more confident, with the EU referendum having choked off the supply of new buildings just as overdevelopment was becoming a risk.
4. Co-working continues
The rise of WeWork, which has continued to fuel the office sector, was another key trend identified, with the American co-working giant taking the most prominent advertising slot at MIPIM above the entrance to the Cannes Palais in a major statement to everyone arriving at the show.
With WeWork having been confirmed as London’s biggest occupier of new office space in 2017, there is some speculation that it will now pause for breath. But many MIPIM delegates were equally expecting WeWork to branch just as rapidly into new fields, through lifestyle concepts such as WeLive apartments. There was a general understanding that leasing has changed forever, with flexible options now a crucial element of any discussion.
5. ‘Alternative’ sectors on the rise
As traditional assets like retail and, to a lesser extent, offices perform less well, hot ‘alternative’ sectors were on the agenda in Cannes, specifically student accommodation, build-to-rent and even apart-hotels.
Indeed, apartment hotels are the new hot ticket, with institutions such as LaSalle Investment Management and Brookfield piling into the sector. Companies seeking corporate lets and tourists who have become familiar with the concept through Airbnb are fueling this demand.
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6. Life sciences key to London
Life sciences was seen at MIPIM as the sector most likely to follow tech in boosting the London office market. The world-leading Francis Crick Institute, the biomedical research centre located adjacent to St Pancras International station, is seen as kick-starting a whole ‘Knowledge Corridor’ through Euston and onwards to Paddington.
7. Doubt about the London Plan
The London Plan and its influence on the market was another hot topic, with many believing that the sprawling document produced by Mayor Sadiq Khan’s office – and for which consultation responses were due on 2 March – is highly impractical and will lead to less, not more, being built in the capital.
Certainly, the assumption that 35 percent affordable housing will be possible in new developments is seen as far-fetched, particularly among developers sitting on expensive sites and facing a housing market already hit by soaring stamp duty charges.
8. Housing market flattening
The London Plan is also expected to lead to a flatter housing market, with new development slowing, particularly in prime central London locations. Across the capital, developers are reconfiguring sites and development appraisals to assess whether they can build more mid-market homes – and homes for rent – rather than trying to sell properties at the now stratospheric £3,000-per-square-foot mark they aimed for in 2014, 2015 and 2016.
9. UK construction ailing
This trend towards a flat housing market has contributed to an ailing UK construction industry, particularly given the collapse of top builder Carillion and a wave of profit warnings sweeping the outsourcing and facilities management sector.
10. Logistics front of mind
But while several sectors are expected to flounder, there was one sector at MIPIM that almost every delegate spoke positively about: logistics. The forces of e-commerce that are driving people away from those weaker shopping centres, high streets and retail parks into the arms of home delivery are – if anything – growing stronger and are spreading across continental Europe at a rapid pace.
The fastest-growing UK real estate investment trust at MIPIM was SEGRO, which is now worth around £8 billion as a result of owning a blue-chip portfolio of warehouses stretching from urban logistics on the edge of town to big boxes on motorway junctions.
Overall, MIPIM 2018 indicated a mixed picture across Europe’s property markets, with the gap between the winners and losers becoming more polarised over the last 12 months. Some will succeed, others will fail, but no serious downturn is predicted over the next 12 months, even as the 10th anniversary of the global financial crisis comes into view.
Giles Barrie is a Senior Managing Director at FTI Consulting and former Editor-in-Chief of Property Week. Photograph credit: Getty Images.