29 February 2016
Andrew Friend, head of UK Property Distribution, discusses Henderson UK Property Trust
Andrew Friend, Henderson's head of UK Property Distribution, recently gave us an update on the UK property market.
After a bumper few years for property returns, Andrew says the outlook for the sector has become more “normalised” in 2016, with income set to become the key driver of returns after a few years of capital growth dominance.
What's happening in London at the moment?
Ten-year population growth forecasts for London are for an increase of roughly 1.3 million people. Over the long-term, this will obviously be a positive in terms of residential and commercial demand in this market.
In the shorter term, however, 'core' London markets are moving towards risk of oversupply in 2017/2018.
While areas like West End core offices and City core are not yet oversupplied, they do have large building projects that are about to come online. These will start to limit growth.
Sub-markets are evolving, however, with large infrastructure projects like the Crossrail and the High Speed 2 (HS2) train line driving fringe-based growth. Peripheral locations including Stratford, Croydon and Shoreditch are attracting companies looking for more affordable office space.
Oversupply will cause rental dampening for the next two years in central London, but Brexit fears are the biggest risk for rental growth.
Where are you seeing opportunities for the year ahead?
Outside of London, speculative development is commencing in the strongest regional cities. Key regional locations could start to outperform, but subject to pricing.
Currently, the fund's regional split comprises a roughly 38% London allocation, 29% in the South East, 22% in the North and Midlands area, 8% in Wales and the South West, and 4% in Scotland*.
In terms of sector expansion, we are seeing an increase in hotels and leisure properties, off the back of a trend for people to fill their spare time with consuming experiences, rather than purchasing goods.
Meanwhile, industrials and logistics are also driving investments across the country.
What are some of the challenges facing the property sector?
Technology is changing the patterns of how we work and live. Growth rates for new industries are expected to outstrip those of traditional sectors.
For example, shopping habits are increasingly moving online, meaning that retail warehouses are some of the best placed to take advantage of these structural changes. Getting the right sizing and tenant demand for stores is also a key factor. Central and suburban London's occupational market is extremely buoyant right now.
*Source: TH Real Estate, as at 30 November 2015. Quoted in Henderson Global Investors, UK Commercial Property conference presentation, January 2016. Totals may not add up to 100% due to rounding
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Andrew's views are his own and do not constitute financial advice.
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