A row of houses covered with scaffolding.

Real Estate and industry news, autumn 2019

Matt Weaver gives his update and insight into real estate, from residential investment and development to commercial investment. 

As the UK prepares for its proposed departure from the EU, the real estate sector has certainly worked hard to adapt to the ambiguity so far this year.

With our strong connection to local markets, we’ve been busy contacting clients across the UK, and our relationship approach to supporting our clients and the sector has never been more important. While sentiment remains uncertain, we continue to support SME businesses and the real estate sector through our specialist lending products and relationship management teams across the UK. Opportunities are still out there for investors and developers to pursue and, by utilising the industry expertise and national coverage model of our Real Estate team, we continue to help support our clients’ ambitions.

I hope you enjoy this quarter’s update, and if there’s anything you’d like to discuss, please get in touch with your local Real Estate Manager

Home interior - dining table and chairs, towels on top of a side table.

Residential investment

Seeking rental yield amongst Brexit uncertainty

The last few months have been a difficult period for real estate investors, as Brexit uncertainty continues to cloud over market forecasts and dampen property prices. This outlook has been particularly present in London for some time, as residential property prices continue to flatten and, in some cases, decline across the capital.

On average, the capital has witnessed a 4.4% average price decline over the first half of 20191. Buyers are taking a longer-term view though and, while this is proving to be a tougher year for sellers, buyers are being presented with attractive investment opportunities from the select stock coming to market. Coupled with competitive lending rates, rental demand remains strong for quality residential properties in city locations, as would-be first-time buyers continue to rent instead of buy.

Investors are also looking elsewhere in the UK for residential investment opportunities and we continue to see strong regional activity. The weakening of sterling for example, whilst negative for property prices, has enhanced the already attractive status of UK universities for international students. University cities with a high concentration of students, such as Nottingham, Liverpool, Manchester and Leeds, have boasted impressive rental yields so far in 2019 – in some cases, upwards of 10%2.

Investors are continuing to adapt to legislation in the UK, as the phasing-out of mortgage tax relief in-line with its April 2020 deadline has seen some landlords’ tax bills double in 2019. Alongside various relief schemes ending, this year’s tenant fee ban has added to many landlords’ burdens, as they’re left to absorb letting fees from their bottom line2. Despite these legislative changes and Brexit headwinds, residential rental growth across the UK is still demonstrating strong returns, with average rents up by 2.3% at £959 per month3 year-to-date across the UK. 

A builder measuring windows inside a living/dining room.

Residential development

Modern methods to overcome cost challenges

Developers have found 2019 to be a challenging year to date, as uncertainty persists. New-build deliveries are sensitive to the macro and economic forces at play, as well as the upward trend in operating costs within the construction sector, as both material and labour prices continue to rise4. Labour and material aside, the supply of quality building plots has seen a spike in price recently, meaning purchasers whose objective is to sell to a secondary buyer once they have planning approval, may see a lower return on their investment5.

Developers have also become increasingly adaptive throughout 2019, as more modern methods of construction, such as modularised structures, have been deployed to offset rising costs. Modularised builds allow developers to reduce cost and time into their builds, with a positive impact on cashflow. Alongside simplification, scale has been a key theme through 2019 for developers. With a strong demand for land, smaller plots have increasingly been sought5.

With the availability of suitable plots within urban areas also a key challenge, the rural economy has witnessed an increased focus from both government and private residential development activity in 2019. Growing connectivity both in terms of digital and logistical infrastructure has encouraged buyers and developers alike to look at rural areas that enjoy access to nearby major cities.

Housing associations have showcased an increased focus on rural homes in 2019, with approximately 5,000 new homes completed in rural areas across 2018-2019 – an increase of 4% year-on-year6. This strong rate of new rural housing delivery forms 12% of total housing association completions year-to-date. 

Commercial units.

Commercial Investment

Diversification through location and sector

Across the major commercial sectors, we’ve seen a decline in average lease lengths being negotiated by tenants seeking greater flexibility from their landlords. Combined with declining lease lengths and weakening yields, investment rates into commercial assets have cooled off through the second half of 2019. Investors are increasingly looking to regional assets with a mix of location and sectors, as well as strong tenant covenants to attract positive yields7.

With the continued growth in flexible, shared, office-space providers, we’re seeing the demand from tenants expand for adaptive spaces that can be modified to suit businesses and provide a more holistic ‘lifestyle’ service8. Although retail continues to see ongoing challenges, we’re seeing some resilience from the high street, in particular with local operators and where high footfall, retail and leisure assets will benefit from a bricks and mortar presence in an increasingly digital and competitive online marketplace9.

If you have a client with a real estate case that you’d like to discuss in more detail, you can either contact your Business Development team who can put you in touch with our specialist Real Estate team, or contact your dedicated Real Estate team directly, who’ll be happy to help.

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The views and opinions expressed in this content don’t necessarily reflect the views of Barclays Bank UK PLC, nor should they be taken as statements of policy or intent of Barclays Bank UK PLC. Barclays Bank UK PLC takes no responsibility for the veracity of information intimated by a third party and no warranties or undertakings of any kind, whether express or implied, regarding the accuracy or completeness of the information given. Barclays Bank UK PLC takes no liability for the impact of any decisions made based on information contained and views expressed in this presentation or article.