For Professional Clients and/or Qualified Investors only

UK Property
Market Trends
August 2018

Contact us BMO REP forecasts show positive total returns, averaging 4.6% per
annum over five years, underpinned by the income return.
UK, London – Head Office
BMO REP has upgraded the 2018 all-property total return forecast to 5.2%, reflecting
BMO Real Estate Partners
the strength of investor demand in the property market. The upgrades have been most
7 Seymour Street
marked for Central London offices and standard industrials. Forecasts for 2019 have
London
been slightly downgraded, reflecting the possible impact on sentiment from interest
W1H 7BA
rate rises and the Brexit negotiations. We are projecting a modest recovery thereafter.
020 7499 2244

Research
Components of BMO REP Forecast All-Property
Sue Bjorkegren
Total Returns – per cent
sbjorkegren@bmorep.com

6
5
Business Development 4
3
Jamie Kellett 2
1
0
jkellett@bmorep.com -1
-2 2018 2019 2020 2021 2022

Implied Income Return Capital Growth Total Returns

Source: BMO REP July 2018
Telephone calls may be recorded.
Forecasts are provided for illustrative purposes; are not a guarantee of future performance; should
not be relied upon for investment decisions; and are subject to change without notice.

Key Risks
Our review and outlook is a marketing communication providing an overview
of the recent economic and property market environment. It should not be
considered as advice or a recommendation to buy, sell or hold investments. Nor
is it investment research and has not been prepared in accordance with legal
requirements designed to promote the independence of investment research and
is not subject to any prohibition on dealing ahead of its dissemination.
Past performance should not be seen as an indication of future performance.
The value of investments and income derived from them can go down as well as
up as a result of market or currency movements and investors may not get back
the original amount invested.
The value of directly held property reflects the opinion of valuers and is reviewed
periodically. These assets can also be illiquid and significant or persistent
redemptions may require the manager to sell properties at a lower market value
adversely affecting the value of your investment.

Continued
 PAGE 2

Economic and Property Market Overview

The UK commercial property market is continuing to deliver steady positive total returns but may be at
a plateau.

Market Snapshot Q2 2018 All Retail Offices Industrial Alternatives

Total Returns 2.2 0.5 1.6 5.1 2.6
Income Return 1.3 1.4 1.2 1.2 1.3
Capital Growth 0.9 -1.0 0.5 3.9 1.3
Rental Growth 0.2 -0.5 0.3 1.2 0.2
Gross Rent Passing 1.0 -0.3 2.8 1.3 0.0
Net Initial Yield 5.0 5.7 4.5 4.6 4.9
Source: IPD Monthly Digest June 2018. The definition of Alternatives is the Portfolio Analysis Service definition of “other” which includes hotels, residential, leisure etc.

The economy is showing signs of improved growth after a weak

start to the year, but it remains lack-lustre. Concerns about Brexit
remain as the March 2019 deadline approaches, with seemingly Total Returns by Segment Q2 2018 per cent
little agreement within the UK government, and much to be
finalised with the EU.
Standard Industrials
Distribution Warehousing
Offices City
Three Month Rolling Average All-Property Total Alternatives
Offices Rest of UK
Return – per cent to June 2018 All-Property
Offices Rest of South East
Standard Shops Central London
Offices West End/Midtown
9
8 Retail Warehousing
7 Standard Shops - Rest of UK
6 Shopping Centres
5 Standard Shops - SEE*
4
3 -1 0 1 2 3 4 5 6 7
2
1
0 Source: IPD Monthly Digest June 2018
*SEE – South East and Eastern
2013 2014 2015 2016 2017 2018

Source: IPD Monthly Digest June 2018
At the all-property level, property delivered a 2.2% all-property
total return in the second quarter compared with 2.3% in the
previous quarter. The income return has remained stable and
was 5.4% in the year to June 2018, with annual capital growth
of 5.3%. Rental growth was 0.2% in the quarter compared with
0.4% in the previous quarter. The quarterly growth in gross rent
passing, at 1.0% was the highest in almost three years.
The industrial and distribution sectors continue to drive
performance, together with alternatives and, in this quarter, City
offices. Compared with the previous quarter, standard industrials,
provincial offices and City offices delivered an improved
performance, with retail weakening.
Most parts of the market have seen a weakening in investment
activity in 2018 compared with the like period of 2017, and only
Central London offices, leisure and alternatives saw investment
levels above the long-run average in the second quarter.

Continued
 PAGE 3

Overseas investors bought almost £5.5 billion of property but

sales levels also increased to reduce net investment from
this source to its lowest level since the global financial crisis. Yield Gap – All-Property Initial Yield versus 10
Institutions are becoming net investors in property once again, Year Gilt Yield percentage points
but this reflects a lack of disposals rather than a renewed
appetite to buy. Inflows to retail property funds were positive in
the second quarter.
5.0
4.0
3.0
UK Property Investment Activity – £ million 2.0
1.0
0.0
25000 -1.0
-2.0
20000

2006

2009
2008
2004
2005
2002
2003

2007
2001

2010

2016

2018
2017
2014
2012
2013

2015
2011
15000

10000 Yield Gap Long-Term Average

5000 Source: IPD Monthly Digest June 2018, Bank of England

0
2013 2014 2015 2016 2017 2018
Overseas Domestic
The UK commercial property market continues to deliver a solid
performance, underpinned by an annual income return of more
Source: Property Data July 2018 than 5%. There is polarisation with industrials pulling further
ahead and retail struggling. Given the economic and political
headwinds and a move to higher interest rates, the market may
The yield gap between property and the risk-free rate was have reached a plateau.
broadly stable during the quarter and well above the long-
run average. Demand is strong for prime property with a long
income stream, but some parts of the market, such as industrials
and Central London offices, may be starting to look expensive,
and there are major concerns about the retail sector. There is
a search for yield and genuine value-add opportunities, and
growing interest in alternatives.

Two Recent
Acquisitions

Apollo Aston Road, Units 2 and 4 Estuary Business Park,

Birmingham Liverpool

Continued
 PAGE 4

The Economic and Property Market Outlook

BMO REP forecasts show performance driven by industrials, distribution, alternatives and offices
outside London.

The UK GDP consensus forecast for 2018 has been revised lower
over the last quarter, but the economic outlook is predicted to
be fairly benign on consensus forecasts with positive, if modest,
GDP growth being sustained. Inflation is predicted to decelerate
towards the Bank of England target. Interest rates are expected
to move higher, but at a gradual pace. Consensus expectations
are for the official rate to be only 1% by mid-2019. Analysts
expect some easing in fiscal policy over the coming year.
Sentiment is being supported by the strength of the global
economy and hopes that a weaker sterling will boost export
prospects. Consensus forecasts are for the UK to out-perform the
Eurozone after 2019 and by around 0.5 percentage points per
annum in the longer-term. However, the protectionist stance of
President Trump and the possible intensification of tariff wars
have added an element of uncertainty.
Consensus Real GDP Forecasts – per cent
The domestic political climate and the lack of clarity regarding
the Brexit terms remains a major concern for the market. At
present, investors seem to regard this as a drag on growth
rather than presaging a recession. The outcome of the October
2018 negotiations and EU summit and the approach of the March
2019 deadline are key milestones which could potentially change
matters for better or worse. We believe that a “no deal” Brexit
would be negative for property across the board.
Forecast Yield Gap – percentage points
7
6
5
4
3
2
1

3.5 0
2018 2019 2020 2021 2022
3.0
2.5 Long-Term Risk Premium 2001-2018
2.0
Consensus Gilt Yield Forecast Initial Yield June 2018
1.5
1.0
Sources: IPD Monthly Digest June 2018, Consensus Economics July 2018, April
0.5 2018, Bank of England
0.0
2018 2019 2020 2021 2022
UK Eurozone US
The longevity of the property cycle upswing has been extended
Sources: Consensus Economics July 2018, April 2018 by the prolonged period of low interest rates and the weight
of money moving into property. Although official interest rates
were raised after quarter-end, consensus expectations indicate
that upward pressure on property yields is not imminent,
although the period after 2020, may prove more challenging.

Continued
 PAGE 5

Industrial, distribution and some alternative assets are expected There are longer-term issues affecting property. This has
to deliver superior performance, along with offices outside been seen most starkly for retail property where a number of
London. We still expect Central London retail to perform administrations, company voluntary arrangements and store
creditably, but we believe that regional shops and shopping rationalisations have combined to turn sentiment against the
centres could continue to struggle. Retail warehousing and sector. In offices, the growth of flexible working is affecting the
regional offices could benefit from their generally higher yields. demand for space and while some disadvantages of serviced
Despite its recent resilience, we are forecasting that Central offices are becoming apparent, the trend towards shorter leases
London offices will be affected by weaker occupier demand and and demand for higher quality space appears more durable. The
the return of second-hand space. industrials market remains attractive but is expensive and some
rental growth assumptions by purchasers could prove optimistic.
Alternative property sectors are expected to continue to grow in
importance as investors seek long income or higher yields, but
BMO REP Forecast Total Returns by Segment this is a diverse market.
end 2017-end 2022 – per cent per annum
The period of annual double-digit total returns may be drawing
to a close, but property still benefits from a relatively high
and stable income return, long-term contracted income and
Standard retail
an established, large and mature investment market. We are
Shopping centres
Retail warehouses forecasting a period of positive total returns, underpinned by the
City offices income return.
West End offices
South Eastern offices
Rest of UK offices
Standard industrial
Distribution
Alternatives
All-Property
0 2 4 6 8 10

Source: BMO REP July 2018

Forecasts are provided for illustrative purposes; are not a guarantee of future
performance; should not be relied upon for investment decisions; and are
subject to change without notice.

Continued

Key Transactions Data
5 Broadgate, London
Several large deals involving overseas
buyers but they are also selling assets
CK Asset Holdings of Hong Kong has
bought 5 Broadgate for £1bn at a
3.95% yield from British Land and GIC
(Singapore).
Ho Bee of Singapore has bought
Ropemaker Place in London for £650m –
from a consortium of overseas investors.
A divestment from shopping centres
Hammerson is preparing to sell a 50%
stake in Highcross, Leicester to a Japanese
bank for £240m at a 5.5% yield.
Lone Star is planning to sell shopping
centres in Southampton, Falkirk and
Gloucester from its Tiger portfolio.
Alternatives in demand
Student accommodation – Allianz is
buying a 40% stake for £350m in the
Chapter London portfolio.
Fonciere des Regions has bought a
portfolio of 14 hotels from Starwood for
£858m.
One Park Row, Leeds
Strong demand for some regional
office assets
Atlantic Quay 1, Glasgow said to be under
offer at well above the asking price, at a
5.25% yield, and following strong bidding,
to a Middle Eastern investor.
One Park Row, Leeds has been sold to
CCLA for £35.6m at a 4.43% yield.
A search for yield
M7, an industrial specialist, is set to buy
the Alpha portfolio of retail warehousing
at a 7.15% yield.
Regional REIT has bought a portfolio of
primarily regional office assets for £35m
at an 8.4% yield.
Local authority buying at keen yields
Liverpool Council has bought Central
shopping centre in the city from Aviva for
£17m at a 4.8% yield.
Portsmouth Council has bought an office
building in Queen St, Manchester for £9m
at a 4.75% yield.
PAGE 6
The Mint office building, Edinburgh
Forward funding and purchasing
Hines is to forward purchase The Mint
office building in Edinburgh.
Tritax is to forward fund a £121m
industrial scheme in Darlington, pre-let to
Amazon, at a 5% yield.
Industrials still favoured
LondonMetric has bought a portfolio of
assets for £55m at a 4.4% yield
L&G has purchased a £182.3m industrial
estate in Dunstable at a 5.02% yield.
Investors attracted to long income but
stock is sparse
The Supermarket REIT has bought a Tesco
Extra in Scunthorpe for £53m at a 5.1%
yield with 22 years unexpired and RPI-
linked uplifts.
Continued
 PAGE 7

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BMO REP Asset Management Plc and BMO REP Property Management Limited are members of the BMO Financial Group and are subsidiaries of the Bank of Montreal.
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