Experts are Optimistic about the Long-term Outlook for Real Estate
2020 was one of the most difficult years on record for real estate, but with the rollout of the vaccination programme, there is light on the horizon with the real prospect of a recovery in market activity as the year progresses.
The real estate market has been more resilient than expected, with strong performances delivered in sectors such as logistics, alternative asset classes and residential. The forecast for 2021 is looking much more optimistic. This confidence is supported by many of our clients who are positive about the year to come and are looking to deploy new money into property.
So, what can we expect will happen with the UK economy in 2021 and beyond, and how will the property market be impacted? In a BNP Paribas Real Estate/Financial Times webcast, we heard experts from within BNP Paribas Group and from the wider real estate community, share their predictions for the road ahead.
Here are a few of the headlines that I took away from the sessions.
Short Term Economic Outlook
For the short term economic outlook, there is still a bumpy road ahead. The economy got off to a bad start in 2021, with a further lockdown and uncertainty around when restrictions will ease.
The first quarter of this year is therefore likely to see another significant economic contraction in economic output. What is different this time around is that businesses and people have learned to adapt to new ways of working and living. Retail sales are happening online, some restaurants can maintain trade through takeaways, while office workers are set up for remote working. As a result, the impact on the economy will be felt less.
A dark cloud on the horizon is the rise in unemployment, currently at 5%, coupled with low levels of job vacancies. The Government’s support measures have delayed the rise in unemployment so further pain is likely.
Although the Brexit deal has clarified some of the uncertainty around the new relationship with Europe, other issues have materialised. We are now starting to see the real economic impact of Brexit, with more strain on global supply chains creating another headwind for the UK.
What is crucial to this short-term backdrop is the central bank’s willingness to do more if the situation worsens. Equally, if the conditions start to improve, which our group’s senior economist expects will happen this year, policy makers are likely to wait until the economy is in a more stable situation before they tighten support.
Any tightening of the fiscal policy by the government when we get to the budget in March is therefore not likely.
Optimistic about the Long-term Outlook
Most importantly, beyond the short-term hurdles in the next few months, our experts were optimistic about the outlook for the UK economy. There are a number of factors supporting a long-term optimistic view.
There is a lot of pent-up demand that will be released as the vaccination programme progresses and confidence returns.
The commitment by central banks to preserve financial conditions at extremely accommodative levels will set the stage for a rebound of the economy.
However, on the road to recovery more business failures are likely and, with the retail sector being particularly hit, it will create huge consequences for property owners as well as retailer, employees and people. The rebound will also offer opportunities for investors who are willing to take them.
What are the Predictions for the Next Three to Five Years?
Looking at the longer-term, what are the predictions for the next three to five years for the economic outlook? Our experts highlighted number of key themes to consider.
Although inflation is expected to rise somewhat, central banks in developed economies are likely to hit their inflation targets. There are a number of fundamental factors that are driving this.
Household inflation expectations have held up relatively well despite measured inflation rates falling sharply. This is a result of consumers cutting back on so called ‘social expenditure’, such as visiting restaurants and hotels, but instead focusing on food and online retail.
Demand relating to ‘social expenditure’ could therefore bounce back very quickly. Some of these businesses such as leisure and restaurant firms may feel the need to recoup lost income by increasing prices, which will have an impact on inflation.
Finally, we have an extraordinary degree of policy support at the moment covering both fiscal and monetary policy. If the support remains in that accommodative setting, which is likely, it will help to drive inflation higher.
The big question many ask is when central banks will start to wind down policy stimulus. We heard at the event that they are likely to be extremely cautious in unwinding support and tightening interest rates due to the tremendous consequences it will have on both the private and public sector.
We also heard that the era of low interest rates are here to stay.
What is Next for Real Estate?
Investors are Prioritising Different Asset Classes
Historically offices have dominated investors’ interest but now we are seeing a major shift in the order of asset classes investors are looking for. There is continued interest in logistic warehouses and alternative asset classes, a trend we have seen for the last five years, and one that the pandemic has accelerated further. More mainstream investors are now looking at alternative areas such as life science and data centres a trend we expect will continue.
Our experts also anticipated that the office market will recover but we are yet to see how that will pan out. Investors need to get their heads around what the future ways of working will look like and how this will ultimately impact demand. How we use offices will change with more focus on the experience and collaboration. The operators that deliver that ideal setting for businesses will become much more important and tech will be key in delivering a user-friendly experience.
Although there is a level of uncertainty around the future of offices, we are still seeing interest. There is significant investor interest in the medium sized office schemes available in central London currently.
In 2020, listed companies focused on resilient income streams including residential and logistic warehouses. Going into 2021, we have seen a change of mind set. Investors’ confidence has been boosted by the rollout of the vaccine and they are now more willing to take risks. Student accommodation offering long income stream and attractive yields are becoming of increased interest.
Wealth management investors are desperate for yields and, in the context of other asset classes, real estate remains an attractive opportunity and continues to be a core element of their portfolios. Private investors are particularly interested in prime assets in major metropolitan cites, but are staying away from secondary locations.
Prior to Brexit, private wealth focused on European capital cities, however, this year with increasing clarity around the UK’s new relationship with the EU, London will become more attractive to private investors.
London has a large pool of prime properties in central locations that will be attractives. In addition, the UK capital offer higher yields than many European cities such as Paris and Frankfurt.
Private investors are less likely to buy into distressed assets, however, this may change slowly as market conditions improve throughout 2021.
Retail is unlikely to feature on investors shopping list, at least until there is some certainty over whether rents have further to fall. 2021 will not be the year they find a floor and there’s potential for shifts in ERVs and Cap Values.
Retail parks are likely to be first to recover, and build on their greater resilience demonstrated in 2020.
Not all retail is off the limit for investors. Supermarkets that are open to click and collect and cater for the shift towards online offers attractive opportunities.
Will more indirect M&A activity happen? We heard that we are unlikely to see further M&A activity in the retail market but potentially in the office market.
Investors are increasingly shifting their targets towards net zero and there is a huge amount of money in the investment community targeting sustainable opportunities. This is a growing trend that will continue in 2021 and beyond.
Investors and real estate owners are realising that green investment will help to future proof their portfolios. A sustainable asset is less risky as it is more likely to comply with green regulations and thereby be future proofed. Unsustainable buildings can become unattractive to occupiers and lose value.
The group’s sustainability expert highlighted that we are also starting to see more green loans or sustainable linked loans, which embeds ESG scoring such as BREEAM and specific key performance indicators around the buildings reduction of emissions.
2021 is set to offer many challenges but also brings optimism for the future. A majority of our clients are positive, and looking to deploy new money into property, although their preference for certain asset classes has changed. The future need and purpose of the office is a discussion that will continue to evolve. It’s clear that how we use offices will change and the focus will be on creating exciting environments for collaboration that will support the business brand and its objectives. Another topic high on investors’ agenda is sustainable investment. A sustainable portfolio is no longer a nice to have, instead investors are increasingly realising that green buildings are less risky and generate better value.