Commercial real estate debt was cited as one of the best investment ideas in the UK property market for 2019, during an on-stage discussion during JLL’s UK market predictions event, held in London last week.
Questioned on investment picks for the year during a panel discussion moderated by BBC business editor Simon Jack, JLL’s global head of funds advisory, Matilde Attolico, listed “beds, sheds and debt”.
Indirect investors into real estate are focusing on investments relating to a variety of accommodation types, the booming logistics market and real estate credit, Attolico explained, adding: “Although, on the debt side, we have seen a sharp drop in capital-raising trends for debt funds. But it is still an important theme for structuring transactions into real estate because it feels safer to a lot of investors.”
The drop-off in debt fundraising volumes, noted by Attolico, tallies with global figures published last week by our sister title, PERE.
Also speaking on the panel, Mike Sales, chief executive of Nuveen Real Estate – formerly TH Real Estate – cited debt as an important aspect of diversification strategies: “Commercial real estate debt is going to be a great place to hide out for the next three years and you’ll get equity-type returns with a really nice [equity] cushion in some instances,” he said.
Speaking more generally about global capital flows to real estate, Attolico explained most institutional investors are under-allocated to the asset class, compared to where their risk models tell them they should be: “The average target allocation for most pension funds is a minimum of 10 percent. In an analysis of the top 100 investors – taking out the Japanese mega-whales – 60 percent are under-allocated. If they came up to 10 percent, it would mean a trillion dollars into real estate.”
The UK, she continued, remains at the top of investors’ list of priorities: “From an investor perspective, they have money on the sidelines, because they know the UK corrects quickly and unless you have money ready, you cannot capture that.”
Other predictions made at the event included:
• UK commercial property investment is forecast by JLL to reach £55 billion (€61 billion) in 2019, head of UK research Jon Neale revealed. The firm’s UK chief executive, Chris Ireland, has previously explained that the same volume had been predicted for 2018, although the market outperformed. “When the numbers are counted it will be an over £60 billion year. Outside London, especially on the occupational side, I think it will be the strongest year we’ve ever seen. 2018 definitely surprised on the upside,” he said.
• IPD returns, JLL expects, will be 5.5 percent across 2019, down from 6.3 percent last year, but masking a mixed performance across sectors, with industrial likely to generate double-digit returns.
• Neale suggested firms should be preparing for the possibility of a no-deal Brexit, which remains a “real possibility”. Although the impact of such an event cannot be played down, Neale stressed the market is better positioned for a shock than in 2008: “Outstanding commercial debt is about two-thirds of 2008 and has been stable for some time. Back in 2008, it had been going up by about 10 percent a year. LTVs are also much lower as well and ownership of real estate, especially in London, is more internationalised so owners are not subject to short-term domestic and financial pressures.”
• Discussing the impact of a no-deal Brexit, Neale added: “I’m pretty sure it would lead to real falls in economic and market activity. The pound will take another downward plunge and we can see a lot of volatility in bond and debt costs. This might, in turn, create opportunities for some players, particularly overseas buyers, given the currency or well-positioned and well-capitalised local actors who have been searching for product for some time.”
• While retail is being hit by the structural change brought about by e-commerce and low consumer demand, Neale said employment figures and wage growth could bring positive news. “This might explain why some of the Christmas trading figures have been tentatively optimistic for the first time in some time, particularly for aspirational brands which have managed to combine e-commerce with bricks and mortar retail. So, perhaps this year might start to see people recognise why there are many assets in that sector which are in trouble and there are some really worth looking at as well.”
• In the flexible workspace sector, more own-brand launches by investors and developers should be expected, as well as joint ventures and management agreements with existing players in a maturing market, Neale said.
• A major problem this year, Neale added, may be adequate supply, rather than enough demand, especially in the prime market. Investors will be encouraged to explore “more unconventional real estate sectors” in order to gain access to stock, he added.