Price growth and build volumes will be subdued, but 2017 is a year of innovation for resi construction – JLL

A round-up of real estate sector predictions from JLL

2017 is going to be a year of uncertainty, declares JLL in its latest round of real estate forecasts, with Brexit negotiations providing a question mark for all sectors of the industry and economy.

On the macro front, the team expects the UK’s economy to continue to grow – but by a fair bit less than in 2016. It will, however, probably out-perform most other developed nations… Rising inflation and, potentially, market interest rates will be the year’s big economic story, as currency movements start to properly affect consumer prices.

That uncertainty etc is inevitably going to weigh heavily on the residential sector… Here’s how JLL sees 2017 panning out here:

  • Residential property prices will be pretty muted this year, as investment demand continues to be subdued by stamp duty changes and Brexit uncertainty.
  • Price growth will be subdued in London, with 0.5% increase forecast for the UK, rising to 1% in London – although the big regional cities may outperform.
  • Manchester, Edinburgh and Birmingham are likely to be property price hotspots.
  • Building costs will escalate as a result of sterling devaluation.
  • The supply of new-build units in London will fall, from 24,000 new homes built in 2015 to around 16,000 in 2017.
  • Building practices will get more innovative, led by off-site construction techniques.

Here’s JLL’s Lead Director of UK Residential, Andrew Frost, with his predictions for the resi property sector in 2017:

New build starts will hold at just below 2016 levels across the UK as a whole – but will fall dramatically in London, where need is most acute

Legislative changes, such as stamp duty, and the uncertainty around Brexit have led to weaker investment demand from overseas as well as domestic buyers. Alongside an overstretched owner-occupier market, this will keep a lid on price pressure. At the same time, build costs will see significant in inflation as the devalued pound sterling hits imports while the Mayor has continued to push for bigger affordable housing contributions. As a result, in contrast with the nearly 24,000 homes built in London during 2015, 2017 levels are expected to fall back closer to 16,000. The challenges for the Mayor to use public land, planning and investment to stimulate supply are steep. There is much to be encouraged by so early on in his tenure, but his oft-used phrase of ‘it’s a marathon, not a sprint’ is only too true. A strong, stable political backdrop for housing policy aligned with the creation of the new London Plan and Government White Paper will be an important handrail for an industry in need of guidance.

2017 will be the year in which innovative techniques begin to be used much more widely in residential construction

Off-site construction will be at the forefront of this; anchored by the first large-scale factory in the UK that will come on-line in 2017, the industry is nally getting serious about the need to ‘modernise or die’ as the Farmer Review so directly puts it. With a shrinking and destabilised workforce, the need to go off-site will become ever more critical and the first big steps will take place in 2017. Aligned with this shift, and perhaps just as important, is the need for greater adoption of Building Information Modelling (or BIM). A standard requirement for public sector construction, BIM has not been widely adopted in the private sector, other than in 3-D modelling at design stage. However, BIM can produce a level of cost certainty that is not possible with traditional build methods as well as even more significant savings through more accurate and standardised procurement and post-completion feedback loops.

Price growth will be subdued in London, with 0.5% increase forecast for the UK, rising to 1% in London – although the big regional cities may outperform

Prime London is also expected to be at as a result of ongoing re- pricing that has taken place since Q3 2015. Very little house price growth is expected over the year as the country absorbs Brexit uncertainty and knock-on impacts to consumer price in ation and affordability, which is already stretched. There will be hotspots however – notably in the stronger city regions of Manchester, Edinburgh and Birmingham. Manchester city centre has experienced weak supply levels over the past few years, pushing up prices and rents by circa 15% and 11% respectively in 2016 with little relief expected in 2017. In Edinburgh, the suburban family homes markets are all seeing strong demand while Build to Rent in the city centre and towards Leith is taking shape. Birmingham, beneficiary of the first big Housing Growth Fund investment into 2,000 new homes, is also finding renewed attention after having been overlooked by large-scale residential investors in favour of Manchester coming out of the downturn.


And here are JLL’s key predictions for other real estate segments in 2017:

Capital Markets

  • Average total returns will be around 4%, with capital values broadly stable through the year.
  • There will be a divergence between prime and secondary. Prime yields will stabilise, but secondary values will be vulnerable to a slowing economy as investors focus more intently on core assets and occupier resilience.
  • Hong Kong and mainland Chinese capital will lead the charge in London. Private buyers and property companies from Hong Kong and China are targeting London as they look to increase their overseas exposure. Many private buyers have also viewed exchange rate depreciation as an opportunity, and we expect this to persist in 2017.
  • The regional market has seen a substantial in ux of capital from local authorities, which spent over £1bn on UK property during 2016.
  • UK funds and global institutions will gradually return from a post-referendum pause; volumes will remain in line with long-term averages, reaching around £45bn over the year – similar to 2016.
  • Interest rates are likely to rise slightly, but will remain very low by historic standards, delivering all-in borrowing costs at between 3% to 4% at 60% of the funding stack.
  • Uncertainty over the economic outlook and Brexit will accelerate the drive for investment in alternatives, where income streams are often less vulnerable to uncertainty surrounding the near term economic outlook.

Occupier

  • Occupiers will be forced to adapt to uncertainty and volatility in 2017, with the outcome of Brexit the primary concern.
  • While there has been increasing evidence of contingency planning and data gathering exercises in alternative European locations, evidence of strategic relocation activity into the EU will remain limited in 2017.
  • Technology and digital disruption will continue to reshape industries, organisations and real estate in 2017. There will be an increasing focus on smart buildings, new types of space such as incubators and accelerators and more tech-enabled space within existing envelopes. Integrated sensor and the Internet of Things technologies will drive more data-defined workplaces, moving towards adaptive design and personalisation. Greater digitization, dependence on technology and volumes of data will also bring cyber security more fully onto the agenda for real estate teams.
  • User experience will become an increasingly central part of real estate and workplace strategy in 2017; health and wellbeing will also become a more integrated part of overall design and strategy cementing links between HR and corporate real estate teams in 2017.

Sustainability

  • Enlightened city and regional leaders will unlock commercial opportunities from the green economy.
  • We will see a new wave of powerful, regional mayors (elections are due in May in Greater Manchester, Liverpool City Region and the West Midlands); this new tier of leaders could accelerate the transition to greener and smarter cities.
  • The minimum energy efficiency standards (MEES) will make it unlawful to let commercial buildings below an EPC rating of E from April 2018; landlords will need to act this year, while investors and developers may see acquisition costs fall for properties currently sitting below the minimum standard.
  • Corporates and investors will focus on tackling inequality, with the minimum wage likely to come in line with the National Living Wage this year, larger firms (over 250 employees) having to publish details on the difference between their male and female employees’ pay, and a levy on employers being introduced to help fund apprenticeships.

Offices

  • Rents will come under pressure in London, but falls will be limited.
  • More subdued market conditions will lead to divergent performance within London’s sub-markets depending on their respective supply levels, demand mix and price point.
  • Public sector requirements from HMRC and the GPU will boost regional of ce take-up in 2017.

Retail

  • Retail spending will drop as rising inflation bites consumers. However, the reduction will not be uniformly felt across the country, with major retail centres likely to demonstrate ongoing resilience, at the expense of less relevant centres that have been slow to respond to both cyclical and structural change.
  • In 2017, retailers will endure a ‘perfect storm’ of rising inflation, labour costs, import costs and in some cases business rates and ongoing ecommerce–led structural change.
  • Falling rents, the rating revaluation and the weak pound may create opportunities for investors in 2017.

Industrial

  • Occupier demand will remain above the long-term average, with limited supply supporting rental growth despite the slowing UK economy.
  • Industrial will deliver the highest total investment return of the commercial sectors in 2017, and will remain the strongest performing sector up to 2019.
  • Labour will become an even more central issue in 2017.

Alternatives

  • With the mainstream commercial market coming under pressure, the long dated income available in the alternative sectors will continue to attract investors looking for stable income.
  • The Private Rented Sector is expected to see the most growth.
  • There will be an increase in the number of partnerships between operators and long-term funders.
  • There will be increased polarisation within the market in terms of asset quality.

Construction & Development

  • Construction growth will slow over 2017, with the public sector, infrastructure and housing offering potential bright spots.
  • The outlook for construction activity will brighten if the government follows through with its commitment in the Autumn Statement to spend £23bn on innovation and infrastructure and unlock funding for affordable homes and private house building.
  • An ageing construction workforce and the government’s decision to progress with the apprenticeship levy could further undermine labour supply in the short term. Skills shortages may be further exacerbated in the coming months given recent government rhetoric around immigration policy, combined with the effects of the falling pound on the earning power of EU workers in their domestic currencies.
  • Developers may look towards more strategic refurbishments, given quicker speed to market and greater certainty of delivery than costlier new build projects.
  • Innovation in construction methods, such as off-site fabrication will present opportunities to enhance efficiency and alleviate skills pressures. Creative use of materials, such as mass timber, are coming to the fore with the potential to deliver cost and programme savings coupled with experiential and sustainability benefits.

jll.co.uk