February 11, 2022
Originally published by Property Week.
Making predictions is hard and this year is no exception. Concerns around escalating geopolitical tensions and inflation loom large in the background, the latter driven by unprecedented growth in the money supply during the Covid pandemic.
In the US, the money supply is up by more than 35% and in the UK by more than 20%. In the UK, the situation has been compounded by Brexit, creating the need for structural changes to the way we trade. In our opinion, these UK headwinds will pass, whereas inexorable population growth, the pressing need to create more environmentally resilient assets and the under-delivery of housing will combine with more persistent inflation to give UK real estate another golden year.
The £10trn residential market performed exceptionally well last year, up more than 10%, driven by the demand of investors seeking inflation-linked rental income. With continued demand and no supply solution, 2022 will see prices rise with increasing levels of institutional ownership, especially in the single-family market, where asset liquidity is better and construction risk lower.
After a total return of more than 35% in 2021, the industrial and logistics market may seem overvalued. Yet given that 97% of new space was leased within 12 months in 2021 and a development pipeline today of only 18m sq ft (4 months’ supply), rents will undoubtedly continue to grow. Logistics, alongside residential, will remain popular for inflation-correlated income to investors. The key issue for both will be that levels of suitable assets will be exceeded by demand.
It is also fair to say that with the Covid outlook significantly brighter this year, the prospects for the office and retail sectors are also better. Pandemic-induced ‘hybrid’ working patterns are here to stay, although companies will have to entice employees back to the office. Higher-quality modern assets with strong amenities on offer will see stronger occupational demand, as well as avoiding the substantial capital costs to meet tomorrow’s environmental standard. Similarly, retail should see a continued recovery as footfall gradually increases, although this is more likely to be concentrated in more accessible retail parks. These are also favoured by investors, as rents are lower and alternative uses underpin the value.
Other alternative or operational assets, such as data centres and healthcare centres, have done well, with investors seeking ways to deliver returns outside of a crowded marketplace for mainstream assets. However, as it stands, there is not enough of these assets and they require a high level of specialist skills. For this reason, they cannot provide a scalable substitute to deliver income to a portfolio. Instead of chasing these alternatives, at Fiera Real Estate we favour targeting mainstream sectors while undertaking strategies that are more difficult to execute. For example, we will continue to develop new residential and logistics assets across the UK, achieving a better risk-adjusted return from our expertise.
Many of the current headwinds, significant as they are, will pass but structural issues such as inexorable population growth, the pressing need to create more sustainable and resilient assets and consistent under-delivery from a fragmented and politicised planning system are surely here to stay. Perhaps these are the real issues for investors in UK real estate to consider in 2022 and beyond.
When the future looks less clear, it is often useful to draw lessons from the past. Today, we are in a bull market where it is all too easy to make money. Last time, this led to new entrants riding the market with a poor understanding of risks relative to the return. If we have learnt anything from history, it is that at this point in the market you should undertake strategies where you can add value, have little or no leverage to defend against volatility and where you fully understand the asset risks. If you do this then you can capitalise on what remains a remarkable UK real estate opportunity.
Alex Price is UK chief executive officer at Fiera Real Estate