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Taken by surprise
If any UK property market forecaster had stood up at the start of the year and predicted that in December we would be debating whether the market will quite hit double digit returns for the year, not even the most bullish observer would have taken them seriously. In the February 2017 IPF Consensus Forecasts, the average expectation of the 25 contributors for the full year was 3.2%, the most optimistic of which was 7.0% compared to our current forecast of 9.7% for 2017. So as we move into a new year it would seem a suitable time to reflect on what has driven that exceptional level of outperformance, and crucially whether those drivers will be able to continue to support the market into 2018 and beyond.
The Great Wall of Chinese Money
The appetite for UK real estate from foreign buyers has been one of the big upside surprises this year. Chinese buyers have dominated the headlines with the purchases of trophy assets, but beneath these rather exceptional deals there has been a solid flow of foreign capital into the UK market, focused on Central London. The bulk of the money has come from Asia, and in particular Hong Kong where off-shore Chinese money is currently unaffected by capital controls, but there has also been a noticeable increase in activity from European and particular German investors. This is partly why most expectations for yields from the start of the year - to either be flat or edge out slightly - have been proven wrong as all sectors, according to MSCI data recorded inward yield shifts in 2017. We would note, however, that the foreign demand is heavily focused toward core income producing assets. This is the segment of the market which has driven the overall inward yield compression.
Source : UBS AG
