Some commercial property yields have tightened despite a succession of lockdowns that restricted what businesses could be open and where people could work.
"How on earth has this happened?" was the opening gambit of moderator Merryn Somerset Webb, editor in chief of MoneyWeek, at the BNP Paribas Real Estate Capitalise webinar.
"It certainly didn't feel that this was going to be the outcome when we started off in lockdown in March 2020," said BNP Paribas Real Estate, UK CEO Etienne Prongué, "But it's been very resilient as a sector over the last 12 months."
Particularly surprising has been the performance of the office market. "A lot of people thought it would have had some serious issues going forward due to tenant demand, but it's held up really well," he added.
Held up is key here. Markets in London, the South East and some core cities have seen small yield shifts, while others are still struggling with low demand.
Where there has been the greatest yield movement, said Prongué is space that can satisfy demand from the life science sector and prime West End offices.
Initial estimates of reduction of office space because of hybrid working haven't been as bad as was first thought. Stephen Wolfe, Head of Commercial, BNP Paribas Real Estate, UK, explained: "A lot of CEOs are talking about 'magnetising the workplace', creating a place that clients and employees really want to come to and that means, in many cases, more space per person."
He added that while businesses are looking to take slightly less core space, they are increasingly interested in buildings that offer flexible space, for example, cafes, business lounges and on-demand meeting space.
Outside of the office sector, "beds and sheds" continued to dominate the UK property investment story, said Wolfe.
He cited house price affordability and job mobility as fuelling demand for BTR accommodation: "We've seen it in city centres, and that will continue, but we're increasingly seeing it in suburban, and even urban locations as the need for BTR moves into family housing."
There are also good prospects for the senior living sector. Samantha Rowland, Head of Healthcare & Senior Living, BNP Paribas Real Estate, UK, pointed out there are 12 million over 65s, which will increase to 16 million in 2035.
The UK has a chronic lack of supply and a lack of choice. She added: "Only less than 1% of over 65s in the UK are in a retirement living community or senior living facility. And that's in comparison to 5% in New Zealand, Australia and the US."
Historically the focus has been on properties for sale, but operators report an increasing level of enquiries for rental. Rowland explained: "There are only two operators in the whole of the UK that are currently doing a pure rental model. And I think as it evolves and people change, we will see that coming in more often."
The distribution sector continues to have a bull run and now accounts for 30% of transactions, whereas 10 years ago, it was 10%.
Supply chain and construction programme constraints are hampering the delivery of new space. BNP Paribas Real Estate figures suggest the supply of big-box space equates to about four months demand. Wolfe said that while this is a problem, it is also an opportunity as it will drive rents and capital values.
The retail sector's struggles are well known, and values have dropped by 50% in the last five years, but this is making it an attractive proposition. Prongué explained: "People are beginning to believe that we've potentially reached the bottom, and investor activity is picking up with particular emphasis on out-of-town retail which has seen some really strong performance."
Where is the money coming from for UK real estate?
Investor allocations to real estate are going up, said Prongué, with the view that inflationary pressures will push them up further.
The flow of US capital is an important indicator. In 2019/2020, it hit a high of just under £13bn which is "a really good signal", said Prongué. Half of that money has gone into logistics, 30% into alternatives, and only 7% has gone into retail.
For the last three years, European investors have accounted for the biggest portion of the market at about 25%. Prongué said this was a surprise given Brexit but expected it to continue: "We do have a yield differential between, let's say, Paris and Berlin compared to London."
By contrast, money from Asian investors has been about a third of what is typical. But this can mainly be put down to travel restrictions due to COVID-19 and not having staff in the UK to view properties.
COVID-19 restrictions aside, inflation is probably the biggest challenge for the market. However, Prongué said that despite a lot of moving parts, returns "are going to be there for the taking" in UK real estate investment.
