“The investment market has returned to pre-pandemic levels,” was how BNP Paribas Real Estate UK’s CEO Etienne Prongué opened the Capitalise webinar.
“We saw volumes rise by almost 30% to circa £60 billion, which is 10% above the 10-year average.”
With 10-year total annualised returns touching almost 8.7%, he described the property market as having had a “pretty good” 2021 despite the huge challenges faced by people and businesses.
But what has shaped that performance, and what can we expect in 2022?
Paul Hollingsworth, Chief European Economist, BNP Paribas, said rising inflation is the dominant feature in the macro-economic picture, but there were reasons to be optimistic.
Omicron has had less impact on the economy than expected, and supply chain issues are showing tentative signs of easing - although labour shortages remain an issue.
“The economic recovery still has legs, and I think this year should be another year of relatively solid growth,” he said.
While the economy has returned to pre-pandemic levels, he pointed out that it still has ground to make up for the lost growth period during the pandemic.
It is the economic bounce back and supply chain disruption which has helped fuel rising inflation. And Hollingsworth was asked whether this was ‘good’ or ‘bad’ inflation. In the short term, hikes in energy prices are hitting consumers, which is bad.
“At some point, energy prices should return to more normal levels. Or at least, if we think about inflation being the annual rate of change, if prices level out where they are next year, the rate of increase will drop out of the annual comparison, and inflation will come back down,” he said.
If demand remains strong, and that is reflected in wage growth, then it becomes ‘good’ inflation. Strong demand could also lead to business investment and an increase in productivity.
The dilemma for policymakers is balancing interest rate rises to control inflation while not damaging economic growth.
Hollingsworth said there is a room manoeuvre because interest rates were significantly below what central banks consider as neutral – 2.5-3%. “The key question is how quickly do we need to get back to neutral?” he added.
While the economic performance has perhaps surprised, at a micro-level, there have been some surprises in the UK property sector too.
Investment volumes have bounced back, as the figures show; distribution continues to be strong, now accounting for 30% of the investment market.
The office market has been the biggest surprise given the restrictions on where people could work and the increase in hybrid working.
Speaking on the UK Outlook panel, Stephen Wolfe, Head of Commercial, BNP Paribas Real Estate, UK, said the trend was for quality, attractive workspace office with additional flexible and communal spaces.
In the residential sector, BTR remains in demand, with the sector expanding to suburban locations and family housing. Senior Living remains a sector with potential; the over 65s population is rising, and provision in the UK is behind other key markets.
There was even room for optimism for the beleaguered retail sector. Interest from investors was on the rise, Prongué said, with the perception that pricing had “potentially reached the bottom”.
Aside from inflation, the impact of reaching carbon neutrality on the property sector was a hot topic. In the Carbon Conundrum panel, off-setting and the carbon market were discussed.
The key message was it should be used as a last resort when all other avenues had been explored. Investing in new woodland and peatland restoration to sequester carbon is well regulated but requires careful consideration.
However, such an investment does offer businesses an opportunity to do something proactive and positive as part of their sustainability strategy.
Overall, Prongué said real estate investment transactions could be up to £66bn this year, “which would signal a bull market ahead”.
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