U.K. continues to exceed expectations as rocky Brexit negotiations carry on

An abundance of liquidity, opportunities in urban logistics and demand for serviced office space in London has resulted in the United Kingdom exceeding expectations as the country continues its rocky negotiations to leave the European Union, according to LaSalle Investment Management’s midyear 2018 investment strategy annual report.

The report also notes that the U.K.’s independent monetary policy, improved fiscal position, continued strong flexible labor market and inexpensive currency are also helping the country’s real estate market defy predictions of a post-Brexit vote blues.

LaSalle adds that continued low bond yields make income-producing real estate look attractive, while London continues to appeal to investors thanks to high liquidity and transparency.

In terms of individual sectors, LaSalle says that positive rental growth in London is expected from 2020 onwards, driven by strong demand from serviced office operators, while above-inflation rental growth is still expected to continue in the industrial space. The latter has seen some opportunities emerge in converting edge of city and edge of town retail space into high-performing logistics areas. LaSalle also predicts that residential remains a “long-term relative winner” in spite of a slowing housing market and easing demand from foreign workers.

Mahdi Mokrane, LaSalle Investment Management’s European head of research & strategy, says: “The U.K. real estate market has exceeded expectations in 2017 and the first half of 2018, despite economic fragility and ongoing geopolitical uncertainty.

“Looking ahead, we believe there will continue to be an abundance of liquidity targeting both ultra-secure, annuity-like level real estate as well as enhanced-return real estate. The former stems from domestic pension funds seeking an alternative to index-linked bonds, and the latter from global real estate funds sitting on a significant quantum of dry powder and looking for attractive opportunities.”

The report also finds that real estate markets across Europe are in good health, with offices expected to see strong growth over the next 18 to 24 months.

Contrary to the United Kingdom, prime shopping centers and high street rents are expected to record solid growth over the next few years and rental growth in logistics should exceed historic norms in France, Italy and Spain.

Jacques Gordon, global head of research and strategy at LaSalle, says: “Thus far, 2018 has shown adaptability to the structural, secular and cyclical changes that have rolled through the commercial real estate market.

“Our midyear update indicates that core real estate continues to perform at an appropriate level, relative to other asset classes, and that the inclusion of real estate raises portfolio returns, for a given level of risk. With looming trade wars, geopolitical tensions, and differential exposure to rising rates, this pattern of highly-correlated global growth could be coming to an end. Our midyear update indicates that the last six months have raised the probability of country-specific differentiation, as both positive and negative trends unfold in the final six months of the year.”