Why it pays to look beyond the gloomy headlines

Charles Tan

Charles Tan

The negative newsflow around the UK real estate market is mounting.

The last few weeks it was all about falling consumer confidence and supply constraints in residential property, highlighted in media coverage of the Budget. Now, it’s the slowdown in commercial office space grabbing the headlines.

The number of new office developments getting under way in London has dropped by 9 per cent in the past six months, according to a new report from consultants Deloitte.

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The firm's London Office Crane Study also indicates the amount of new office space under construction is at its lowest since 2014. 

"The changeable business environment continues to keep CFOs on a cautious footing,” said Deloitte. “It is this caution that is being reflected in the shifting outlook for future office development.

"The top of the list is Brexit, and during the negotiation period it will continue to play its part in creating uncertainty for businesses, now and potentially after the exit."

So far, so bad. But it’s easy to be gloomy about the immediate outlook for real estate, and ignore the medium to long-term view.

Behavioural economists call it anchoring, the natural human tendency to base judgment, often irrationally, on the most recent information available. Step back from the headlines, examine the underlying trends, and the outlook for UK real estate appears much brighter.

Deloitte’s study, published bi-annually, shows that despite the second successive fall in the current level of space under construction, 2017 remains on course to produce the highest level of completed space in 13 years.

And, although forecast future demand for office space has softened from the break-neck speed of recent years, it remains above-average for each year to 2021.

Even more encouraging is the vote of confidence in real estate from long-term institutional investors, such as pension funds.

Ever since the Great Financial Crisis, when bonds and equities unexpectedly fell simultaneously, institutional investors have been searching for ways to diversify into uncorrelated sources of returns, such as alternative assets, in the belief that they will help to smooth returns over time. 

Asked “Which asset classes will be most suited to meet your plan’s goals over the next three years?” European pension funds surveyed by Create-Research, an independent research boutique specialising in asset management, said that their number one choice was global equities with real estate bonds second and alternative credit third.

“Real estate will go on attracting rising allocations after scoring new highs lately,“ said Create. “Like infrastructure, it is now credited with defensive features such as steady capital growth, regular income and inflation protection.”

Retail investors are often accused of chasing returns, buying when prices are high and selling after they have fallen. Institutional investors, on the other hand, are supposed to do the opposite, buying when prices are low and selling before they peak.