Investors should brace themselves for a potential correction in London’s property market in 2018, but a full scale crash should be avoided even as capital values come under pressure, according to Kames Capital’s David Wise.
Already showing signs of a slowdown in 2017, Wise believes London is currently in the latter part of its market cycle, with only the income component providing some stability.
Wise, co-manager of the £555m Kames Property Income fund, says as a result the London market could see a correction in the coming year.
“In 2018, we expect property returns will be primarily driven by income rather than capital returns as London and the industrial sectors slow,” says Wise.
“London is, as expected, showing signs of slowing down as the government works its way through the Brexit negotiations, and we believe the London market is at a late-cycle stage so we expect a correction/ slowdown in the future, but not a crash.”
Wise and co-manager Richard Peacock have minimal exposure to London within their fund, with just 1.1% in the City and 3.3% in outer London.
Instead, they favour other regions such as the North West and Yorkshire for the portfolio, with the Brexit-induced portents of doom predicted for the UK at the start of this year having failed to derail large parts of the property market.
“Property prices have remained remarkably resilient and as a whole returns have been stronger than most thought,” he says. “At a sector level, industrials have been the driving force behind capital returns, and are arguably now looking expensive, but at a tenant/occupational level demand has been resilient against a backdrop of generally limited supply.”
“Our favoured picks for the coming year therefore lie mainly outside of London in offices in the top regional cities. When looking for value, we see opportunities in good quality high street retail in the strongest regional cities – but being selective here is important. Acquiring properties in good locations that suit occupier requirements, combined with committed tenants, will offer sustainable income-generation opportunities.”
Wise adds the big risk to UK property markets more broadly in 2018 remains Brexit and the eventual terms of the UK’s departure from the European Union.
“The spectre of Brexit does still hang over the UK, and as such, the primary risk to our outlook is a bad outcome in the negotiations. Another would be a macroeconomic slowdown driving a weaker occupational market, or indeed, interest rates rising higher than expected without the domestic economic strength to support higher rates,” he says.
“But with the benefit of experience, our view is that when looking at the property market as a whole it is likely that property yields can stay at current levels as long as the economy continues to perform as it is.”
 According to the Kames Property Income fund factsheet, as at 31 October 2017.