Maven's property outlook for the year ahead

Andrew Whiteley and Colin Anderson, Partners at Maven, recently spoke to CoStar on the UK property sub-sectors where investment opportunities may arise throughout 2019. Read the full article below:

Commercial property investments are a key part of institutional portfolios and sectors such as student accommodation, hotels and offices have performed well in recent years. 

Looking forward, against a backdrop of greater economic uncertainty, compounded by concerns around Brexit, some analysts have suggested the outlook for commercial property will be more challenging this year. However, the strong fundamentals of the three core-sub sectors plus institutions’ continued search for robust yields should mean that they all continue to perform and will remain a core holding for many institutions for 2019.

Student accommodation will continue to see strong investor demand

At Maven, as a developer of student accommodation, we remain very positive about the outlook for the sector due to its resilient fundamentals and believe that it continues to offer strong opportunities for investors.

We expect continued demand in purpose built student accommodation to be driven by a significant population bulge in the 16-20 age bracket of school leavers intending to start university in the next two to three years, as well as from overseas students, attracted by the perceived strength and reputation of the UK’s education system.

On the supply side, while there has been a high level of student accommodation development in recent years with some markets and cities experiencing a surplus, there are still locations, particularly in the regions with considerable levels of undersupply.

An understanding of where and how students want to live and how they use their accommodation and delivering this at an affordable price is also imperative. Maven’s approach is to create amenities that help build a community within a development, and tailoring these to fit into the specific requirements of the local area.

From an investor perspective, purpose built student accommodation developments, once completed and occupied can generate high single digit or double digit geared cash on cash equity yields, which for assets typically located in or around a city centre is compelling versus other sectors. As a result, we continue to see very strong investor demand to support the development of purpose built student accommodation.

Hotels offer strong development opportunities and robust yields

The UK hotel sector performed extremely well in 2018, with particularly strong revenue levels recorded in the regions. At Maven we remain optimistic about the outlook and believe that 2019 may be a year of opportunity. The competitive value of the pound has boosted UK tourism which in turn benefits the hotel sector’s trading performance and we believe that the sector remains robust in the face of uncertainty and trading performance growth is set to continue in 2019, albeit it at a slower pace.

While some regional markets risk an oversupply of new hotel accommodation, there are other towns and cities where development is certainly required. We continue to see development opportunities throughout the UK and we expect that differences of opinion in the market will allow shrewd investors to capitalise on this, and with funding more difficult to secure we can afford to be very selective in our investment decisions.

Regarding disposals, overseas investors have been very active in acquiring regional hotels, as we experienced first-hand with the sale of Hotel Indigo Glasgow in Q4 of 2018. We have also seen an increasing interest from institutional investors in hotels operated under management agreements, presumably attracted by the yields on offer in the sector.

From an investor perspective, hotel developments, once completed and open for business, can also generate very attractive cash flows. Again these are typically properties which are well located in city centres and the income stream can outperform other commercial property assets. Consequently, we typically expect to hold completed hotels until trading matures and benefit from the income generated during our investment period.

Office Space benefiting from innovation and the security it offers

Offices are also following a similar trend to student accommodation – the focus is on getting the location and offering right for tenants. The office market has been transformed over the past 10-15 years. Large tenants – blue chip companies and public sector organisations have wound down their leases and many of the traditional office buildings of the 1970s and 1980s no longer match market demand.

The modern professional now favours access to amenities such as a lounge or gym and proximity to key infrastructure, while companies are seeking shorter leases to stay in line with the changing work environment and fast-moving economy. As such the size and shape of office space has seen big changes in the last few decades, in particular with the advent of flexible and co-working office space.

Some areas with good transport infrastructure have enjoyed significant price rises in office space recently, such as the Thames Valley, Slough, Manchester and Birmingham, but there are still shortages of office space in other areas so there is still room for speculative development.

With regard to London’s office market it appears to be as buoyant as ever. Brexit has had an impact, but this is likely to be short-term, whatever the outcome as the Capital’s long-term commercial office market fundamentals are still strong. The UK will always be a strategic location for international business due to time zones between Asia and the US and foreign businesses are keen to invest in a market where the ownership of property is seen as probably the most secure in the world.