UK Real estate recovery set to be faster than previously predicted, says CBRE

  • Logistics occupier and investment demand will continue to increase
  • Investment in institutional multifamily residential sector to reach record high
  • UK real estate investment projected to reach £53bn at end 2021, up 26% on 2020
  • Further regulatory action on climate change to put onus on property sector

The UK property market is now on track for a swifter recovery than CBRE predicted six months ago, the company said today as it unveiled its updated mid-year forecasts for the remainder of the year.

As the economy strengthens, CBRE expects strong GDP growth in Q2 and above-average growth rates for the rest of the year (7.7% for 2021 as a whole), with UK GDP returning to pre-pandemic levels by the end of 2021, six months earlier than originally forecast.

Whilst not all sectors have yet returned to full health, the logistics and the multi-family residential sectors have led the recovery and are already reaching record highs. Already in 2021, the vacancy rate for logistics property has compressed even further to below 4%, with XXL units (those over 500,000 sq ft) particularly scarce. Despite the limited supply, CBRE predicts both logistics leasing and investment will experience an even busier second half of the year than the first.

Logistics investment volumes soared by 122% in Q1 2021 compared with Q1 2020 and the firm predicts that online retail sales growth alone will necessitate an additional 59m sq ft of e-commerce-dedicated logistics space in the UK between now and 2025.

Tasos Vezyridis, Head of Logistics & Retail Research, CBRE commented: “Driven principally by consumer buying habits over the course of the pandemic, demand for logistics property has reached record levels, which we expect to continue.

“Following a further compression in prime yields during Q1 2021, investors and landlords will now be focusing on opportunities for rental growth given low vacancy rates and a relatively healthy development pipeline.”

In the residential sector, CBRE forecasts that a very strong market will soften only slightly as the Government’s stamp duty holiday and other forms of pandemic-related support, begins to taper away. Even so, CBRE expects house price growth of 5.9% in calendar year 2021, compared with 10.9% in the year to May 2021.

The multi-family sector transacted circa £1.5bn worth of deals in H1 2021, reflecting a 30% increase year-on-year, with the sector forecast to have transacted £4.2bn by the end of 2021.

Jen Siebrits, Head of CBRE UK Research said: “The resilience and strong performance of the residential sector throughout the pandemic is driving a wave of capital to the sector. As such, we expect investment to remain strong throughout 2021 and beyond.”

The firm also expects all UK commercial real estate investment to increase by 26% to £53bn by end 2021 (2020: £42bn), broadly matching the levels achieved in 2019 (£53bn), though still some way off the record UK high achieved in 2015 (£70bn).

CBRE anticipates further regulatory action on climate change as Glasgow hosts the COP26 climate talks in November, and as real estate decision makers focus on the implications of the UK’s new 2035 emissions reduction target. There will be a particular emphasis on wider and deeper reporting of real estate emissions, and the development of a UK Green Taxonomy.

Julie Townsend, Head of Environmental Consultancy, CBRE commented: “With the UK Government’s commitment to placing climate-related financial disclosures and greenhouse gas emissions targets on a legally-binding footing, and the US’s renewed commitment to the Paris Agreement, the need to mitigate real estate’s carbon emissions and adapt buildings for an inevitably warmer planet has shot up the agenda for CBRE’s UK clients.”

“CBRE expects a barrage of new regulatory announcements from the UK Government over the months leading up to COP26 climate talks in November, including on better and deeper reporting and disclosure of emissions by big firms. We will also see progress on the development of a UK Green Taxonomy, which could label certain aspects of real estate, and real estate transactions, as ‘not environmentally sustainable’ for the first time.”

Other predictions from the report include:

  • Office take-up to remain very heavily dependent on Government guidance on working from home. Office leasing is not likely to return to normal levels of activity until full occupancy is permitted in line with Government guidelines.
  • Online retail penetration to remain at 26% of all retail sales by the end of 2021 (the same as 2020, but up from 17% in 2019), but to continue to rise thereafter.
  • A -9.5% fall in retail rents by the end of 2021 compared with end 2020.
  • Continued difficulties for the hotel sector given ongoing international travel restrictions, although there are now some signs of recovery with occupancy increasing, albeit slowly. For the rest of 2021, we expect the leisure hotel market to focus on domestic customers instead of international customers.
  • Continued evolution of property taxation, with further announcements expected on the future of business rates in the Autumn. CBRE is not anticipating major structural overhaul of business rates, although action seems likely to be taken to broaden the rates base and simplify reliefs. An online sales tax may well form part of the Government’s preferred solution.

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The UK economy, and UK real estate, has mostly bounced back faster than we expected in December 2020, and there is potential for a further acceleration if remaining COVID-19 issues can be effectively resolved – especially those relating to returning to the office and international travel.

Some real estate sectors, especially logistics and residential, have already performed very strongly, and the second half of 2021 is likely to be almost as strong – potentially even stronger. Even better, the UK’s vaccination programme – among the world’s most successful, puts the country in a great place to reclaim the top spot on international real estate investment after the temporary uncertainties created by Brexit.
Miles Gibson, Executive Director, UK Research