In prime property circles, 2017 might be remembered as the year capital growth died. Towards the end of the year, house prices in many global cities throughout Europe and the US were relatively unchanged from where they were in 2016. Prime house prices in London were down about 5 per cent; in Manhattan, they were down about 8 per cent.
I can’t see how any of this is going to change in 2018 and certainly not if central banks raise interest rates. Yields are low in major global cities, and show little sign of picking up.
Property predictions, especially mine, often turn out to be wide of the mark, but in London I would expect to see declines in both prime and mainstream markets — perhaps 3-5 per cent down year-on-year. In New York, too, a raft of new supply slated for this year will probably keep prices down.
Perhaps we’ll see growth in what might be called “hedge cities” – those supposed safe havens that might keep their head at a time of increasing geopolitical volatility. So as Brexit takes hold, then Paris, Berlin, Frankfurt or Dublin – and the rest of Ireland – might expect to see increased investment. Madrid too, could see some gains as the dust settles on the Catalan referendum. Recent data already show a pick-up in fortunes for the Spanish capital.
However, minimal capital growth and less-than-thrilling rental yields will probably push investors towards higher-risk, higher-return property markets, or else force them to leave property behind altogether. In fact, with stock markets rallying at the end of December, and property funds reporting their worst year since 2013, perhaps investors have already moved on.
But the jury is far from unanimous. FT Residential has brought together a range of property experts to give their predictions for 2018. Here’s what they see in their crystal balls . . .
Signs of a changed property risk environment
Last year, we thought owners of prime homes would do well to enjoy the income and amenity derived from their properties, rather than rely on them going up in value. Capital growth has slowed in many world markets — and the UK, London especially, is no exception. This advice still applies in 2018 and probably beyond.
We also said global property investors would be chasing income but opportunities would increasingly be few and far between in secondary locations, alternative asset classes, a few European cities and emerging economies. This has been borne out by falling investor numbers in conventional asset classes, such as shops and offices, as well as falling yields in alternative asset classes, such as student housing and logistics, and in non-prime locations.
Looking at 2018, we would say these trends are symptomatic of deeper structural shifts in the nature of property risk, which goes beyond a late-cycle search for yield. That is not to say risk is disappearing, just that it is changing and being assessed differently.
Expectations, as both the US Federal Reserve and Bank of England raise base rates, are that global yields will move out. However, we don’t think widespread capital value erosion will be a consequence because, in most world property markets, yields have not moved in as much as bond rates. There is a cushion between what bond investors expect and what property investors, perhaps with an eye on the longer term, have settled at.
The driving factor now is interest rate expectations because, in a low, stable interest world, there can be no capital growth without rental growth. This puts much greater emphasis on occupiers and market fundamentals. Property demand will be driven by what occupiers want, and the economic factors driving what occupiers can afford will determine (against available supply) the rents investors can expect.
The search for stable long-term income streams will more closely align the interests of landlords with those of tenants and begin to change the type of property and locations investors are interested in. Whether you are providing living, leisure or work spaces, the aim must be to catch talented in-demand millennial workers. This will take new types of property and new management skills. Markets that can provide both will prosper long after 2018.
Yolande Barnes is head of Savills World Research
Cities still hostage to domestic economic fortunes
A year ago, I stated that the critical issue for international property markets was domestic economic performance. It remains the principal driver of demand and pricing, although tax, currency, capital controls and interest rates are critical, too.
While London’s fortunes will continue to be buffeted by taxation and the outlook for the pound, Brexit — and its impact on employment — will be the overriding issue to watch. The uncertainty it has created means we are not expecting prices to rise in 2018, though we do believe recent price falls will help transactions to continue to pick up from the lows of 2016.
Paris, a market that has struggled for strong price growth in recent years, is benefiting from the improved economic outlook for the eurozone. The French capital is also back on the radar of global investors, in particular those from the US, the Middle East and Europe. We expect to see healthy price growth this year, perhaps up to 9 per cent.
Low prices in Berlin and Madrid, compared with other big European cities, combined with the delivery of higher-grade new units, is generating international interest — especially from investors. This is helping to drive up prices, which we expect to rise by 7 per cent and 5 per cent, respectively, this year.
Dubai is expected to experience modest growth in 2018 after weaker performance during the recent market cycle. Government investment in the economy and infrastructure is helping to attract more employment, driving demand higher.
Singapore’s upmarket residential market has been in the doldrums for several years, but we expect it to shift up a gear in 2018 as market sentiment improves. We predict it will end 2018 with prices 5 per cent higher. Hong Kong, with ongoing demand from mainland China, should post the strongest growth of Asia’s biggest urban markets during 2018, with a 7 per cent rise by the year-end.
In North America, prices in Los Angeles should continue to grow: we forecast 3 per cent this year, reflecting an imbalance between supply and demand. The prime New York market is still dealing with the impact of higher inventory volume and is likely to replicate London’s flat price performance in 2018.
Liam Bailey is global head of research at Knight Frank
Best of British should retain its appeal
Best-in-class assets top my list of recommendations for those looking to acquire prime central London property in 2018. Investors should buy what will sell in any market, so buyers should focus on a lateral apartment in a well-managed building in a good part of Chelsea, say, rather than a dark basement flat on a busy Mayfair street.
While Asian and Middle Eastern buyers might once have fixated on new-build, they would do well to avoid areas of oversupply, such as Nine Elms and Battersea, in south-west London. Buyers who insist on new-build should look for small boutique developments where competition for tenants will be less pronounced. Better still, investing in a refurbished apartment on a neighbouring street would allow a buyer to benefit from the price uplifts from the new development, without paying the new-build premium, high service charges and ground rent.
Developers have been trying to turn the attention of international buyers away from trophy assets in London. The number of overseas property roadshows rose last year for the UK’s interregional cities, such as Manchester, Birmingham and Leeds, which offer cheaper options.
Tax changes are also a catalyst for the shift from residential to commercial investments. With some hand-holding, international clients can be enticed away from London West End office space to regional investment opportunities offering very attractive yields, with solid long-term leases, blue-chip tenants and favourable rent reviews.
The UK will maintain its appeal for buyers from Singapore and Hong Kong. The relentless economic and political uncertainty of the past few years has paralysed many UK buyers, creating opportunity for overseas investors. Currency plays have had a significant impact, facilitating discounts of up to 20 per cent and reducing the impact of new capital gains tax legislation in 2015. The pound, however, is showing signs of bouncing back and, following the recent rise in interest rates, this may continue into 2018.
The pent-up demand created by the Singapore government’s cooling measures is starting to produce a gradual rise in transaction levels and prices. That said, with a falling population and a significant pipeline of new-build homes, the market could still be at risk of oversupply — which is likely to turn buyers’ attention elsewhere.
In November, Hong Kong prices rose for the 18th consecutive month, but there continues to be speculation that the bubble is about to burst. With the Hong Kong dollar pegged to the US dollar, the market is expected to feel the effects of interest rate rises over the next 12 months, as well as a tightening of restrictions on the outward capital flow from mainland China — all of which means UK property will still be high on many Asian buyers’ shopping lists.
Sarah Vaulkhard works on Property Vision’s overseas desk in Singapore
For more expert opinion on what 2018 could have in store for global housing markets, read our prime property predictions (part II)
Photographs: Getty Images/iStockphoto