This is the question JLL Research is always forced to answer in the first few weeks of the New Year in front of several hundred property professionals.
What is the outlook for UK property in 2015?
After 12 strong months for the UK economy and property market, it was undoubtedly tempting to argue that 2015 would see more of the same. Indeed, with inflation and base rates likely to remain at historically low levels until 2016 at the earliest, there is plenty of space for retail spends and disposable income to edge upwards and for property yields to edge downwards.
Admittedly the UK economy is set to slow slightly, with 2.7% GDP growth forecast compared to 3.0% in 2015. Meanwhile, the remarkable job creation rates that London and the wider country have seen over recent years is also likely to decelerate. But with companies now perhaps depleted of the slack they had built up over the long recession, many must now be looking to expand? The emphasis now placed on the quality and design of the workplace – and its role in recruiting staff and enhancing productivity – must surely add to this?
2015: a strong year for leasing markets
Indeed, our outlook is generally very positive, and it should be another strong year for leasing markets, particularly in the regions. Across the major cities outside London, rising demand is likely to meet a constrained supply of new stock – after all, there has been hardly any development since 2008 – producing significant rental increases. This will inspire, hopefully, a greater degree of construction. London will go from strength to strength, with acute shortages in the City and the West End forcing greater take-up in emerging areas such as Stratford.
The impact of the May elections
Decision making, however, may be interrupted by May’s election – perhaps the most uncertain since the Second World War. With the rise of UKIP, SNP and the Greens, the two-party system appears to have been broken apart. It is very difficult to envisage a majority government, even a Conservative one. This may not be a bad thing for property; while Labour would undoubtedly tax property more heavily, the EU referendum promised by the Conservatives would lead to prolonged uncertainty for occupiers and investors alike.
The most likely outcome is some sort of coalition, or perhaps a shifting set of alliances over the parliamentary term. This could be fractious and unstable- but it would also mean that it would be difficult to force through controversial or marginal measures of the type that would affect our market. Nevertheless, this year’s bumper investment transaction total of circa £65bn is unlikely to be repeated as a result – with the pause associated with the uncertainty of the election leading to slightly lower volumes over 2015.
With expectations of prolonged cheap money and low rates, yields could compress even further over the year – perhaps meaning the capital value growth could outperform some of the current forecasts. With international appetite for London undimmed, the scarcity of product could be a further barrier – although we believe UK institutions will be net sellers in the capital, looking to reinvest in higher-yielding opportunities in the regions and in the alternative sectors.
Residential property in 2015
On the residential front, Prime Central London is likely to see the calmest year for a decade, with price growth of just 1.5% expected. However, 2015 will be the year of the rest of London – with 6.5% growth expected across the city as a whole. Generally, though, the watchword will be stability, although there may be a focus on the UK’s appalling record of housing supply as the election campaigns continue. It is, sadly, unlikely to be a major factor for many voters.
Key themes for 2015
The overarching themes that have dominated our market for the past few years are likely to continue in 2015 – a focus on sustainability and the increased focus of corporate real estate professionals on productivity and workplace design. These, however, have been joined by a new factor: the ever-increasing cost of construction. This is likely to dampen much-needed development, which will help keep both investment and leasing markets tight nationally.
So overall, then, a strong year – if not quite a repeat of 2014.