2017 Market Outlook: anything but boring
Christmas is nearly upon us, so we’ve just released our flagship Outlook report exploring the themes likely to face us in the year ahead. 2017 will be anything but boring, but I wonder whether in the rush to de-risk, investors and occupiers alike may overcompensate and miss some opportunities.
No-one is denying that risk has gone up – a risk driven by uncertainty, certainly, but also by the feeling that the global economic cycle is inexorably maturing. With labour markets in the US, Germany and the UK tightening, and unemployment at record lows, inflation (and therefore interest rates) finally looks like it might be on the rise. Bond markets certainly think so.
We cannot deny that 2016 has been a somewhat patchy year. In our report we predict that UK commercial property investment volumes will end up at just under £50bn, about 30% down on 2015. And on the occupier side, some businesses are unquestionably playing the waiting game rather than making long-term commitments to space.
But hang on. 2015 was a thumper of a year for investment, and a year ago even we were predicting that this could not go on. It hasn’t. And actually, in the short term, the UK economy has demonstrated impressive momentum. We think UK GDP growth for 2016 will end up at around 2.1%. So if anything, you could argue that the economy, and therefore the property market, has performed quite well in the circumstances.
That feeling pervades our forecast for 2017 too. As I heard one very senior property investor put it recently: “Real estate people are forever climbing a wall of worry”. But looking at the detail, there is a perfectly good case that property will actually perform quite well in the circumstances.
We do have that surprising momentum in the wider economy. There are plenty of supply-side constraints that act as support for prices, even if demand falls away (which it will). The industrials sector will, we think, continue to impress for that reason. Some of the drivers of occupier demand, especially in the ‘alternative’ or ‘specialist’ sectors, have not got much to do with the performance of the economy anyway. We predict quite a strong performance in those sectors – possibly even beating 2016. Furthermore, some other sectors prefer to see downsides (such as a fall in the value of sterling) as upsides (such as an increase in competitiveness) – such as hotels. And finally, innovation and technology emerge from our report as key drivers of performance in 2017 – what’s tough for retail turns out to be great for logistics and data centres.
It’s a complex picture. If you blindly “go risk-off”, as the jargon has it, you are almost certainly missing something.
I have managed to get this far in my blog post without mentioning Brexit by name. While of course Brexit injects additional uncertainty, there is much more going on. The whirlwind of capital flows, technology, demography and the relentless progress of the economic cycle – what we sometimes refer to as ‘the fundamentals’ – require close attention in 2017.
Read our 36-page Real Estate Market Outlook here.
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