Commercial Insights - Market Snapshot
Our latest take on key market sectors.
7 minutes to read
Real estate investment is steadily becoming easier.
In Europe, economies continue to open up and intra-EU travel restrictions are easing. Resuming some level of travel is important, given that cross-border real estate investment is a major source of activity.
For now, we expect investors to target structural trends and safe haven locations. Based on provisional Q2 volumes, the US, Germany and the UK remain the top three investment locations, globally. Despite the US remaining number one for investment, indications are that Q2 volumes are significantly lower than last year, reflecting that the pandemic reached North America later than Asia or Europe.
In Europe, the logistics sector has held up well and by the end of H1, year to date volumes were above where they were for the same period last year. Germany also shows relative resilience, with Q2 transactions not far off investment levels seen in Q2 2019. In the UK, the acquisition of IQ by Blackstone, boosted H1 2020 volumes for Alternative / Mixed assets to almost 60% above where they were for H1 2019.
The road back to the office is uneven across the UK.
With the cautious re-opening of offices beginning across the UK, the move toward some sort of normality is far from simple. The immediate term will see admittance for employees on a permission-only basis, physical distancing inherent and human transit routes governing movement within the office building. In short, a situation far removed from the working world most would recognise.
For businesses, travel to the office via public transport is also a major consideration and a clear area of vulnerability. This means that firms located in markets of least reliance on public transport, such as many of the UK regional cities and business parks, could encounter a smoother return. Moreover, office design is proving a factor in enabling office re-occupancy. Why? Fewer floors mean staircase access is a viable option for reducing human traffic congestion at lifts. In the UK regional cities, 90% of offices are below 10 storeys. This fact could prove conducive to permitting and encouraging quicker re-occupancy.
What will happen longer-term?
The experiences of the pandemic will clearly have a lasting impact on the way we work and how our workplaces function. Working for home has proved an effective stand-in for the office and will be a component of businesses’ operational structures moving forward. It is not though, a wholesale replacement. A hybrid model whereby some employees are working from home and some are working from the office is likely to prevail. Will this mean less demand for office space? Yes, in some instances, but most firms recognise that business culture is built and reliant on the interaction and collaboration that offices provide. Firms will also give greater attention to operational risk in the aftermath of the pandemic. This could ultimately drive additional demand into the UK Cities, as business strategies may conclude that spreading workforces across a greater number of smaller regional offices could improve resilience.
Positive signs for UK Industrial.
Although the pandemic has had a profound impact on all businesses without exception, recent data supports the case for the UK warehousing market weathering the COVID storm comparatively well.
Foremost, the pandemic has served to accelerate the pace of the consumer shift to online retail, particularly for food. Online sales as a proportion of all retailing was 33.4% in May, it has dipped slightly to 31.8% in June. Compare this to the February percentage of 19.9% and the influence of the behavioural changes created by the virus become starkly clear. In the grocery market, online sales have risen from 5.4% of sales in February to 11.3% in May and remained at this level in June. Significantly, estimates suggest that around 25% of first time online shoppers will also continue using the method beyond the pandemic. To service this growth, demand for largescale fulfilment and ‘near-urban’ warehousing will continue. The pre-let of 2.3m sq ft at Dartford to a global online retailer is confirmation of these growth projections.
Importantly, the UK’s manufacturing sector is also showing signs of recovering. The UK PMI (Purchaser Manufacturing Index) climbed to 60.3 in August,
indicating expansion, and far above the record low of 32.6 seen in April. World PMI climbed above 50 in July, for the first time since January. Although sustained growth is questionable due to decreases in new orders, this improvement indicates that operations are gradually resuming in a number of sectors from almost a complete cessation.
Retail: lockdown = ground zero.
The lockdown on “non-essential” retail stores was lifted on 15 June in England (12 June in N Ireland, 22 June in Wales and 29 June in Scotland). The retail reopening has been very phased, with only around 40-50% of stores re-commencing trading in the first week that lockdown was lifted. Retailers are weighing up the financial viability of operating stores with drastically reduced trade (ca. 30% initially) against higher operating costs as strict social-distancing disciplines are enforced.
Many retail and leisure operators remain in a battle for survival and this will significantly depress quarterly retail rent collection rates in June and indeed September (to a projected 10%-20%). The wave of CVAs and administrations will accelerate in the second half of the year, as cost holidays lapse. Against this occupier uncertainty, rents will continue to rebase rapidly, with capital values following suit (by ca. 30%-50%).
Despite an improving monthly trend, retail trade levels will be significantly below “normalised” levels for some time to come. Christmas 2020 will be the first meaningful temperature check for most retailers, but realistically, any sustainable recovery in the retail sector is unlikely to take root until H2 2021, at the earliest.
Care homes: emerging from challenging times.
After a difficult period, the number of COVID-19 deaths among care home residents has thankfully normalised to pre-pandemic levels. Challenges remain, but operators have been remarkable in their efforts to control the death toll, protect their residents, and their businesses. There will inevitably be an impact on occupancy and income streams, but the aggregate effect across the UK has been moderate compared to other property sectors. We will report the results of our annual Care Home Trading Performance Survey as usual in Q3 2020, but this year the research will be all the more important as we seek to measure the full financial impact of the pandemic.
Despite the challenges, the long-term drivers for healthcare property remain robust with demand expected to outstrip supply in the approaching decades. The development of new care homes and other healthcare facilities is a necessity looking forward and will provide vital access to the prime end of the market for investors seeking long-term fixed income. As shown by Figure 8, specialist developers are already adding new homes across much of the UK.
Build to rent: increasingly attractive.
As lockdown lifts, thoughts inevitably turn to the future. Longer-term, as tenant priorities change as a result of COVID-19, the service-driven model adopted by operators may well emerge as offering clear advantages over the offering in the traditional buy-to-let sector. Purposebuilt, affordable accommodation with a range of value-added features such as 24-hour security, all-inclusive bills and on-site support is likely to be attractive. High-quality internet connectivity will be even more of a priority following lockdown.
Elsewhere, shifts in working patterns and behaviours will lead to discussions about how to maximise ‘work from home’ options, possibly through an increased provision of working space in amenity areas, and the knock-on impact this will have on income, capital and operating costs. The nascent nature of the sector is likely to be one of its biggest strengths in this regard, allowing operators and investors to react and adapt quickly.
What is more certain however is that, despite near-term uncertainties, the need for good quality well-managed rental accommodation to support growing cities remains. This will continue to drive investors to the sector and, as such, investment volumes should continue to grow solidly over the medium-term.