Seventeen for ‘17 - Property Predictions from Blackstock Consulting

With the glittering fizz of Festmas well behind us, the gritty reality of salted roads, clean Brexit and America’s “orange swan moment” are now seeping slowly in. Against that backdrop, we offer up 17 for ’17 – a bunch of thoughts, themes and potentials for the year ahead.

Please do share this post and offer up comments for the things you agree or disagree with. And if you’d like to come and chat to us in London or at MIPIM, drop an email over to [email protected].

1 - Retail prices will rise as currency hedging ends

It was surprising to see most retail analysts failing to price in currency swings last summer when the pound plunged. But as M&S’s embarrassing climbdown has revealed, retailers a) shouldn’t make promises they can’t keep and b) should expect the cost of doing business to increase dramatically. This will clearly have negative knock-on effects for landlords and investors – and consumers.

2 - Brexit will start to damage consumer confidence

Up until now, the post-Brexit apocalypse some predicted has been a bit slow to rise. While nothing quite so alarming is likely, consumer confidence will start to soften as the reality of price rises crystalises. Already, we’ve seen footfall around shopping districts dip over Christmas. Clearly this will further polarise primary and secondary retail locations; continue to drive up appetite for convenience retail; and at the same time, create opportunities for redevelopment or repositioning of older, distressed stock. We’ll see companies emerge to focus on doing just that.

3 - Build to rent cracks through the ice

Build to rent enjoyed a tremendous 2016 and is set to go from strength to strength in 2017. As renters seek out homes that offer certainty, professionalism and decent customer service, build to rent schemes are attracting all the right types of attention. We’ve set up major mainstream press articles in the Sunday Times and Daily Mail for Essential Living. The prospect of being able to both work and workout inside your building, is making this new way of renting attractive to asset-lite professionals, students and silver urbanites. For yield-hungry investors, as an acyclical asset that serves as a long-term income play, the sector is likely to grow defiantly in the face of Brexit turmoil as capital seeks out defensive assets.

4 – Modular shakes off pre-fab tag

Last year saw modular construction gain widespread support from both government and industry as a viable solution to solve the UK’s housing crisis and skills shortage. We helped our client Cast gain significant awareness after it launched a year ago, with founder Mark Farmer’s review ‘Modernise or Die’ gaining significant coverage in the Economist, FT and Sky.

Many journalists hurried to use ‘pre-fab’ puns, yet the schemes we see stacking up around the country are a world away from the low-quality units built post-war. Modular is potentially a quicker, greener and safer way to build. Some believe the finished product provides a level of consistency not seen before in traditional construction. Time will tell of course and it won’t be right for every scheme. But Berkeley’s announcement this week marks a swift turning point for them likely to cause waves across the sector. 

But for modular to become mainstream, ample support will be needed by government to help drive demand, enhance understanding on the part of lenders and change attitudes on the part of clients. Above all, we need greater construction capacity. If all this can happen, then 2017 will see the benefits of modular begin to click into place.

5 - WeWork and co begin to feel the pinch of over-pitching the tent

After a dream-like 2016 for WeWork and co, 2017 promises to be a more testing time, especially in London. With office construction slowing, there will be continued demand for space. But companies’ willingness to pay top-dollar for some serviced offerings will be more muted.

WeWork wants to open ten new working spaces in London this year but may find it harder to find willing occupants in some areas. While it’s taken new space on the Southbank, it has been off-loading property elsewhere in east London. This may be further exacerbated depending on the type of Brexit is finally agreed.

At the end of the day, the price point will be the most crucial decider not just for start-ups and SMEs - who are often stuck in the shop window of these serviced office spaces – but the more traditional firms who make up the bulk of tenants. The trendy and tasty add-ons that the likes of WeWork provide come at a cost that many businesses simply won’t be able to afford. That said, the Blackstock office does have a constant supply of Scotch and craft beer, so we can’t really talk. Whatever happens, the lack of affordable secondary space around Farringdon and the City will continue. As a small business, we believe something will need to give.

6 – Cash continues to pile into big box developers

With a perfect storm being created by the boom in online retail in the UK – set to make up almost a fifth of all retail by the end of the decade – the lack of speculative development for warehouse space, the UK’s ongoing land and planning constraints, and Amazon snapping up all the little remaining stock in sight are all helping the likes of Segro, Prologis and Tritax rake in the cash. Warehousing may have negative connotations, but it is becoming a favoured defensive asset. Its solid demand drivers and a lack of supply are appealing, while leases with occupiers like Amazon or John Lewis offer security almost on a par with bonds albeit with far better returns. Expect the trend to continue as the sheds in Tilbury that hold everyone’s online orders become the new high street. For more info, read this report Blackstock produced on behalf of Addleshaw Goddard with L&G, Tritax, Caddick, Aberdeen, M&G and various others.

7 – Buy-to-let continues to grow in cheap areas

While there has been much worry over the impact of stamp duty changes and mortgage tax relief withdrawal for buy-to-let landlords, demand for housing will continue to grow. Appetite from cash-rich investors and seniors to park their money somewhere they can touch it won’t evaporate over night. And to avoid the punitive stamp duty hike, many are simply looking at lower value homes near commuter hubs, university towns or places likely to receive further investment. Those using minimal debt will be less affected by the cut of mortgage tax relief. While the returns may be lower than two years ago, the total return on housing over 10 years may still represent a better opportunity for many too shy to chance volatile stock markets.

8 - UK continues to ignore spiraling public debt and growing pensions crisis

If we had a cartoonist on staff, we’d sketch a toddler squirming around with fingers firmly screwed into his ears and eyes scrunched shut. Getting to grips with the deficit was a core component of the Conservative Party manifesto that delivered David Cameron a majority government. By the time the Autumn Statement came around last year, Chancellor Hammond had already abandoned Osborne’s pledge to balance the books by 2020. In November’s statement, Hammond warned this debt would continue to rise due to a weak economic outlook. The government now looks to be left with a ￡21.9bn deficit by the end of the decade. Furthermore, low interest rates over the last half-decade have impacted retirement incomes globally. For someone who has been putting money into a savings account or pension fund, the value of their life’s savings is around half what it was for someone who retired at the millennium. The UK’s aging population looks to be hit hard unless action is taken, and with over-65s set to constitute more than a quarter of the population in 50 years time (up from 18% today), the conundrum is far bigger than it has been for any previous government.

9 - Real estate debt will emerge as an asset class

Pension funds invest around 40% of their assets in fixed income securities. We think 2017 will see the rise of real estate debt as an asset class. Pension funds, insurers and a growing army of Asian investors are looking for exposure to prime assets in core London and European locations. It’s an asset class that presents attractive returns with considerable downside protection. Fewer banks are providing long-term debt, but there still remains a refinancing need of around ￡200bn p.a. Institutional investors are well placed to plug the hole left by the financial crisis. There is plenty of room for informed money to make some headway as alternative lenders continue to play more of a pronounced role in the market.

10 – Brexit uncertainty won’t drive down offices as much as predicted

While Theresa May’s recent speech brought some clarity to the Brexit bungling being conducted before us, confirmation of our exit from the Single Market doesn’t bode well for short term confidence. Those who depend on financial services “passporting” that let them use the UK as a base to trade freely with the rest of the EU are still in limbo. While a wholesale “Brexodus” of firms fleeing to the Continent isn’t on the cards just yet, keep an eye out for firms following the example of Lloyd’s of London and considering part-relocations. This sagging in demand might not be as dramatic, but it’ll have just as real an effect on City office rents. Some people share the view that to some extent, the Brexit dip averted a full-on market crash which could have occurred due to unsustainable price rises. While we’ll never know, the reality is that a shortage of older stock is likely to do two things: keep prices high in the centre and push people further out to peripheral locations, such as Acton and Hackney.

11 – Soho will continue to empty out of creatives

While W1 rents have kept the market buoyant, the appeal of Crossrail and an end to the constant background rattle of building works could see prices go even higher as journey times come down. While ad and media agencies long ago fled the shadow of Centrepoint for cheaper, trendier climes such as Shoreditch and the South Bank, the few creatives left in the area are likely to be increasingly pushed out of the capital, with a third of London’s creative workspaces projected to be lost by 2020. Irrespective of whether you love or loathe the Madmen brigade, one thing we should prioritise is London’s nightlife. Increasingly music venues, bars and independent pubs have been hit. As the recent furore over Fabric, in Farringdon, showed, such things are now on the political radar. We’ve already lost legendary venues like the Astoria. Investors need to remember that not all value can be recorded on a spreadsheet. Culture can be priceless.

12 - Manchester will continue to hoover up investment

The Government’s Northern Powerhouse Strategy will focus on manufacturing, pharmaceuticals, energy and digital. Manchester is home to seven of the UK’s 27 digital clusters, including the largest cluster outside of London. The city has a big part to play in closing the UK’s productivity gap. Based on the US experience, CEBR have projected the digital economy in the Northern Powerhouse to grow 20% pa over period to 2020 compared to London’s 5%. This growth will not appear out of thin air. Commitments to connectivity, skills and enterprise have to ring true. But with population growth of younger people on a steady incline, investment in new homes and new commercial space will continue apace.

13 – Absolutely bugger all progress is made over Heathrow expansion

Well, at least some things stay the same.

14 – London sacks off space standards

The government might be consulting on minimum space requirements for HMOs but there's every chance London, where room for development is tight, might sack off space standards, particularly for the burgeoning build to rent sector. Britain may already have some of the smallest housing in Europe but digitisation is making physical storage space increasingly redundant while a new breed of landlord providing on-site communal areas negates the need for large living rooms or kitchen-diners. This is potentially a double-edged sword for developers: smaller homes could be the solution politicians have been praying for as far as affordable housing is concerned; but could damage public trust in the sector. Many will accept a smaller pad in return for more central living, but there does need to be a decency barrier, particularly where more families will be living in apartments over the next generation.

15 - Unlikely pairing of Gavin Barwell and Sajid Javid take sensible decisions at DCLG

Gavin Barwell's inaugural speech at RESI last September cheered many in the industry with a promise to move away from the Cameroon obsession with homeownership and take a more tenure-neutral approach to supply. Combined with bold thinking from Sajid Javid, who promised a ￡1bn infrastructure fund during his run on Stephen Crabbe’s abortive ‘dream ticket’ Tory leadership campaign, we may finally see some sensible decision making at the DCLG. We have seen the department take bold steps already with the Farmer Review, which called on the construction sector to “modernize or die”. Now we need some affirmative action on housing: commitments on public land, director contracting and sensible updates to green belt and density policy.

16 - Help-to-Buy Mortgage Guarantee not missed

The government claims the scheme helped more than 100,000 individuals or couples buy a home. How many of these could have done so without it is the big unanswered question. Given the wealth of high LTV mortgages now available, the scheme (where the tax payer steps in if a borrower defaults) is now not needed. But as most sensible people (and the Bank of England) agree, ramping up public debt based on misleading higher risk borrowers that prices will only go one way is irresponsible and will only end in tears for some. The Help-to-Buy Equity Loan scheme - which is only available on new-build homes - will remain on offer until 2020, in England alone.

17 – You will be unable to have any conversation about business without people mentioning Trump, Brexit or Amazon

Fair play – you’d hope most people have something to say about three of the biggest trends of our lifetimes. But once we head out of Dry January and people start to turn up to networking drinks once again, it might be worth brushing up on another few conversation starters before those evenings all start blending into one again…