Deal or no deal, 2021 heralds a new beginning for UK Real Estate, says CBRE
- CBRE forecasts MSCI UK All Property total returns of -4.4% for 2020, but assuming a Brexit deal, 2.6% for 2021, reflecting the shape of economic recovery
- Real estate investment to rise around 30% from a projected £37bn in 2020 to £48bn in 2021 reflecting significantly lower levels of political risk
- Investment and take-up into the Office sector to recover during 2021
- Logistics sector predicted to achieve capital value growth of 7% in 2021
- Online retail to grow to 30% of all retail by the end of 2025
- Equity targeting UK multifamily investment overtakes equity targeting Central London office investment for the first time
Underpinned by a new political stability, 2021 will herald a new chapter for UK real estate, according to striking predictions made in CBRE’s 2021 UK Real Estate Market Outlook. Despite the high political drama of recent days, Brexit will rapidly fall away as the biggest source of change and uncertainty for real estate in 2021, with attention turning to other issues.
A weaker real economy will induce lower and even negative rental growth in 2021, although some sectors – notably logistics and residential real estate - will dramatically outperform. In the investment market, long-term interest rates are at record lows and there is an abundance of capital looking for a return, which will help to support a recovery in commercial property investment. Even during the pandemic, commercial property yields have not increased significantly demonstrating the continued attractiveness of real estate in the current environment.
Dr Neil Blake, CBRE European Chief Economist comments: “Investors have held off from UK property investment recently partly because of pandemic-related disruption and the potential for it to induce changes in occupier behaviour. These concerns will ease over time for some asset types as the occupier market recovers. For now, though, interest is focussed on ‘near-bond-like’ assets.”
CBRE forecasts MSCI UK All Property Total Returns of -4.4% for 2020, but 2.6% for 2021, assuming a Brexit deal is done. Over the next five years CBRE forecasts average returns of 4.4% per year with rental growth of 0.3% per year. In 2021, CBRE expects real estate investment to rise around 30% to £48bn from a projected £37bn in 2020.
For the office sector, investment and take-up is expected to recover steadily as 2021 unfolds after a difficult start to the year. UK Office yields will remain stable despite a notable fall in capital values of around 11% over 2020 and 2021.
Simon Brown, Head of UK Office Research, comments: “Despite a subdued recovery for office take-up relative to trend, certain sectors will see above-average levels of activity. Office leasing activity in regional office markets in 2021 will likely be boosted by the public sector, which could equate to almost 1m sq. ft of take-up. The life sciences sector is also likely to be particularly active, with the pandemic leading to significant increases in funding and investment within this sector.”
For the Logistics sector, the pandemic has evidenced its essential role of keeping food and goods moving. The year ahead is anticipated to bring further focus on building more resilient supply chains, increasing safety stocks and diversifying suppliers to prevent future disruptions. This restructure of logistics networks will require additional warehousing space in the UK.
Tasos Vezyridis, Head of EMEA Retail & Logistics Research comments: “We expect 2021 to be another strong year for Logistics, on top of record-breaking outturns for 2020. With strong demand and just 10 months of supply available, prices look set to rise even further – we predict capital value growth of 7% in 2021.”
The retail real estate market has arguably been suffering most as a result of the pandemic. However, this sector above all others has also experienced a dramatic acceleration of trends already present in UK retail prior to the pandemic.
Vezyridis continues: “Retail will recover somewhat in 2021, with a sharp bounce back in retail sales on top of fairly resilient consumer spending in 2020. But the ongoing structural transformation of retail real estate will continue, with online retail at permanently higher levels than before the pandemic.”
CBRE expects online retail will account for 30% of all retail by the end of 2025.
The hotels and hospitality market has borne the brunt of the economic and operational fallout from COVID-19. However, out of the crisis has come a decade’s worth of innovation. New operating formats have emerged almost overnight, to be able to respond to unpredictable and rapidly changing constraints. And landlords have teamed up with tenants to unblock supply chains and release facilities (such as pub car parks) to support the national effort.
David Batchelor, Managing Director of Operational Real Estate (OPRE) comments: “Hotels and hospitality will experience a slow but steady recovery after an extremely painful 2020, led by fit-for-purpose, limited-service hotels suited to the faster recovery in domestic budget travel. In both the hotels and hospitality (pubs) sector we predict much closer operator-landlord partnerships to survive weaker demand and ferocious competition.”
Residential property is also forecast to perform strongly in 2021, supported by tax incentives, resilient demand and lagging supply.
CBRE forecasts almost continual year-on-year growth in the multifamily (institutional rented) sector, to £6bn in 2025.
Jennet Siebrits, Head of UK Research comments: “More equity will target UK multifamily assets than Central London offices for the first time. In the owner-occupied sector, we forecast house prices and rents will remain broadly stable in 2021, increasing by 1.0% and 0.9% respectively, owing to the weaker economic outlook.”
Overall, the shorter-term issues arising from the pandemic will continue to weigh on real estate throughout 2021, though each sector will be affected differently. For most types of real estate, reductions in rents and prices will mostly reflect short-term income loss in a stalled economy, with an added measure of long-term uncertainty. But others have been relatively insulated or even seen growth.
Siebrits, concludes: “2021 is a new beginning for UK real estate. The real estate sector will be breathing a very large collective sigh of relief that major uncertainties which have hampered investment and activity are now behind us. With change comes opportunity, and the trick for the informed decision maker is to identify those opportunities now.”
Deal or no deal, 2021 will find us in a settled new relationship with the European Union, after five years of debate, division and uncertainty. We will not quite have left the COVID-19 winter behind, but the shape of that exit will be much clearer. Brexit will rapidly recede into the background as a pre-occupation, as new issues emerge for UK economics, politics, society and real estate.