At the start of the year, we were delighted to host a brilliant line up of speakers from across the Commercial Real Estate, Finance, Tech and Media industries to discuss issues pertinent to UK real estate in 2021 and beyond. Here, Stephen Wolfe, Head Commercial outlines why he thinks 2021 is set to be the year of opportunity for real estate.
2021 is set to be a year of opportunity for real estate, attendees at our recent exclusive online event heard. The webcast, produced in association with the Financial Times, featured experts from within BNP Paribas Group and from the wider real estate community. Here are a few of the headlines that I took away from the four online sessions. Several speakers highlighted the fact that, while we are not out of the woods yet, the rollout of the vaccination programme means there is light on the horizon with the real prospect of a recovery in market activity as the year progresses.
Our senior economist from BNP Paribas, Paul Hollingsworth pointed out that the economic impact of successive lockdowns has actually been less severe than many feared last March, as businesses and consumers have adapted and learned new ways of working and shopping. And the co-ordinated response by governments, with both fiscal and monetary support, is likely to continue through 2021. “There’s a lot of pent-up demand that will be released as vaccination rolls out,” he concluded. “The stage is set for a rebound.”
So what does this mean for the real estate markets? Our chief executive Etienne Prongué said the majority of the firm’s clients are upbeat, and looking to deploy new money into property, although their preference for certain asset classes has changed. Offices have slipped down the pecking order while logistics are seeing the greatest interest.
Investors are still trying to get to assess what changing ways of working will mean for demand for office space, but it’s becoming clear organisations will want their offices to support an increasingly agile working environment. This implies a continuing role for well-located, quality space that brings people together. Investors recognise this, and we can expect continued demand for prime assets in major cities and particularly in a city such as London that is home to global talent and businesses.
Edmund Shing, chief investment officer at BNP Paribas Wealth Management, said his high-net-worth clients were desperate for yield, which actually plays to real estate’s strong suit. He pointed out that bond and credit yields are lower than ever before, and cash was seeing negative yields in some markets. This makes property, especially prime assets in major cities, relatively attractive.
He predicted that London would see more activity, now that the issue of Brexit has been at least partially resolved. London offices currently provide a higher yield than either Frankfurt or Paris and, now that the level of uncertainty has receded, he said buyers would want to move before this yield gap closes.
And according to Rob Jones, equity research analyst at Exane BNP Paribas, listed property companies have been focussing on sectors like residential and logistics that have demonstrated resilient income streams. However, as we move into a post-COVID environment, he predicted they would look higher up the risk curve at assets like student accommodation and prime central London offices. But retail is unlikely to feature on their shopping list, he said, at least until there is some certainty over where rents have fallen to. “2021 will not be the year they find a floor,” he predicted, “and there’s potential for a 20% decline in ERVs and 25% in capital values.”
The webcast also looked at two fundamental forces that will continue to drive market change as short-term disruption subsides: sustainability and technology. Alexandra Basirov, global head of sustainable finance for financial institutions at BNP Paribas, predicted that the way property is appraised was going to change as investors looked at wider measures of performance from their assets. “Assets that fail to measure up risk being stranded so we need a greater focus on the environmental and social impacts of the construction, the operational stage and even end-of-life of properties,” she said. COP26 is going to focus minds on ESG once again, with asset owners and managers renewing their commitment to achieving net zero across their portfolios by 2050 or even earlier.
And the pandemic has driven take-up of new technology that would otherwise have taken years. John Egan, CEO at L'Atelier BNP Paribas, predicted that the functional design of offices would change. The relationship between employees and employers has changed forever, he said, and employees are going to be reluctant to commute to an office only to sit at a desk in front of a computer – something that have now discovered they can do perfectly well from home. Rather, the office is going to be about the things people can’t do from home with a new focus on creativity and collaboration.
And Roelof Opperman, managing director at proptech venture capital house Fifth Wall, added: “The future of the office is going to be focussed on the operator. Before, it was a price-based market and people didn’t care who ran their office or how. But in the future the operation and experience of the office is going to be much more important and tech is key to delivering that experience for the user.”
BNP Paribas Real Estate’s chief executive Etienne Prongué had the final word: “A lot is changing – not just in the economy but in the areas of sustainability and social impact as well – and change brings opportunity for those that are willing to embrace it.”
In summary, our key takeaways from the event and our predictions for 2021:
- While we are not out of the woods yet, the rollout of the vaccination programme means there is light on the horizon. In addition, the economic impact of successive lockdowns has actually also been less severe.
- Reports from many of our clients are positive, many are upbeat, and they are looking to deploy new money into property.
- High-net-worth clients are desperate for yield, and as bond and credit yields are lower than ever before, and cash is seeing negative yields in some markets real estate as an asset class remains attractive to investors. Private wealth is particularly targeting prime assets in major cities.
- To date listed property companies have been focussing on sectors like residential and logistics that have demonstrated resilient income streams. However, as we move into a post-COVID environment, they are likely to look higher up the risk curve at assets like student accommodation and prime central London offices.
- Retail, is unlikely to be a priority for investors, at least until there is some certainty over where rents have fallen to. Further, movement on retail yield is likely before it hits its floor, with a potential for a 20% decline in ERVs and 25% in capital values.
- Despite of the circumstances, we don’t expect intense M&A pressure in the listed sector in 2021.
- Looking ahead, there are two fundamental forces that will continue to drive market change as short-term disruption subsides: sustainability and technology.
- COP26 is going to focus minds on ESG once again, with asset managers renewing their commitment to achieving net zero across their portfolios by 2050 or even earlier.
- The pandemic has accelerated the agile working trend. The operation and experience of the office is therefore going to be much more important and tech is key to delivering that experience for the user.
