Thinking back to the Great Financial Crisis, the UK commercial real estate (CRE) market was far from unique in suffering catastrophic losses.
Since then, it has undergone a significant recovery and regained its place as an appealing prospect for investors.
However, underneath the healthy yields and high demand lies a sense of unease about what 2019 might have in store for a market plagued by economic and political uncertainty.
As investors take a more cautious approach across their portfolio, there are trends emerging that they would be wise to take note of in the CRE market.
Where to invest?
The market can broadly be broken down into four key sectors: retail, office, hotel and industrial real estate. Of these four, we could broadly group them into more attractive and less attractive.
The crisis facing retailers has been particularly well documented. The 'clicks and mortar' conundrum is having a dramatic structural impact on the sector, as increased internet sales continue to cannibalise traditional in-store volumes.
In the UK, this challenge is particularly acute when compared to the rest of Europe, with the move to 'clicks' prompting a downturn for the 'bricks'. Couple this with other more cyclical trends, such as an increase in business rates and labour costs, it paints a stark picture of a sector wrestling severe headwinds.
Meanwhile, the outlook for office space remains uncertain as it is linked to UK GDP growth. Values look set to decrease this year, while external economic factors could act as a further drag on their performance, but more on that later.
Elsewhere, hotel and industrial real estate fared well in 2018 and remain more attractive investments. It is hard to envisage a repeat of last year's value growth, though, and high demand could drive yields lower.
Where are the returns?
The proposition of a 5% yield on CRE investments remains an attractive one for investors when compared with other asset classes, despite sitting 3% lower than its 8% peak in 2008.
However, with a distinctly mixed outlook for the coming year, where can investors expect to see their returns come from?
There is a compelling argument to say that value growth looks unlikely to contribute markedly towards total returns in the future. In some cases, it may even act as a drag, particularly in the more troubled sectors.
This means ensuring rental income accounts for a much larger proportion of CRE returns could be a good idea. All sectors are in line or above their respective 20-year average rental value growth, except for retail which is significantly below.