Making room for a changing landscape: UK real estate is a generational buying opportunity for investors

Today, it is about creating and owning assets that produce a stabilised cash flows and in this regard the long-term fundamentals in the UK real estate market remain strong. 

The UK market

Until recently, the UK was Europe’s largest real estate market. Despite falling behind Germany in terms of volume, we have over £700bn of investable commercial real estate and a £7trn residential market.

The UK is also one of the fastest growing populations in the developed world and one of the densest in Europe. There is strong demand from the growing population – but the country lacks supply. 

The UK Government’s targets of 300,000 residential units a year has been missed every single year and the last decade has seen office construction halved. 

While demand continues to exceed supply, the UK has been off most people’s radars, sterling having fallen 20% against the dollar post-Brexit, and the UK property market has underperformed the rest of Europe by about 10% over the same period.

We hope in 2021 that political and health uncertainty will be resolved, allowing for a recovery in UK value. London remains one of the major cities of the world – and the UK an opportunity for recovery from a low base.  

The new office environment 

Even before the pandemic, the past decade has seen office construction fall by nearly 50%, according to JLL. The health issues of the pandemic have accelerated greater adoption of new technology and enabling a more flexible working model.

Despite this, we have all realised the need for some interaction, which will underpin demand for modern, efficient, and well-located hubs for creativity and collaboration, even if leases are more flexible. 

Property owners and operators need to make sure that offices become spaces that people aspire and want to go to, rather than just modern-day white collar workhouses. 

Changing spaces 

Online shopping habits are also changing in the UK. Prior to the start of the year, approximately 20% of retail goods were sold online.

This year, that figure exceeded 30% during lockdown – and we expect to see this channel continue to grow.

New supply chains and new multi-channel store formats must be built to reflect this shift. New industrial and logistics assets are being developed all over the UK and continue to experience rental growth.

Fiera Real Estate is delivering new assets by acquiring sites of between five and 15 acres on the edges of cities, or within urban areas, building new developments of 50,000 square feet to 250,000 square feet, and in units of 20,000 to 150,000. Occupational demand remains robust for these assets. 

Investor’s appetite

It is not just consumer demands changing. It is also investors. An ageing population has increased pension fund liabilities, yet the falling fixed income market has reduced their ability to meet this.

The collapse in income yields in 2020 has made it a year where risk-free return has been swapped for return-free risk.

Should we therefore be surprised that investors are looking to UK real estate to find inflation protected stable income? Probably not. 

Climate change

Finally, let’s not forget the most fundamental change: climate change. It is going to require many of us to rethink how we locate, develop and use the built environment.

The Government’s 10-point plan for a green industrial revolution is a step in the right direction. But the challenge we face is many assets risk becoming obsolete unless they meet ever-increasing standards and avoid ever-expanding climate impacted locations. 

The results?

The result of all this change is that we need strategies which embrace change and can deliver better risk adjusted returns than a traditional route of simply levered income.

We believe investors should focus on enabling the transition of asset and in turn create financial and social value.

The opportunity is in addressing the fundamental space shortage in certain sectors and in creating or owning these assets that have resilient income.

Alex Price is head of UK real estate at Fiera Real Estate