Commercial Insights - Investment: Cautious unlocking begins
As markets begin to reopen, Victoria Ormond explains how innovation and ESG considerations will be even more relevant for investors and addresses the implications of potential inflationary concerns.
3 minutes to read
What we know
Some real estate activity is resuming. Residential estate agencies in the UK have been allowed to re-open and across Europe, countries
continue to cautiously un-wind their lockdowns and even consider plans for travel. For example, the Baltic states of Estonia, Lithuania and
Latvia has already formed a ‘Baltic travel bubble’, opening their borders to each other, while 11 other European countries have agreed a common approach to reopening their borders. Resuming some level of travel is important for cross-border real estate investment.
What we expect
Innovation to drive future growth. Locations underpinned by innovation should continue to see the necessary wealth and population growth, to drive demand for real estate, both in the occupier and investment markets. Identifying such locations was already important in a lower for longer growth environment. Knowing that innovation often arises out of economic dislocation, identifying these phoenixes becomes ever more important. In the UK, London as well as the university cities of Cambridge, Oxford, Bristol, Edinburgh, Glasgow, Manchester and Newcastle all scored above average for innovation factors, according to our Momentum Cities research.
The ESG agenda to persist. According to Calastone, ESG funds enjoyed record inflows in January 2020 to the tune of £395 million. While March saw outflows of £17 million, £334 million worth of investment flowed back into ESG funds in April. Mitigating the effects of climate change has been legislated for across multiple countries, including the UK. This creates an over-arching backdrop for lower carbon investment into real estate, with potential future regulatory and reputational risks from not doing so. Social investing, particularly workplace wellness should also take on a new focus following the onset of COVID-19.
"There is considerable divergence of opinion over the medium to longer-term inflationary potential of the unprecedented levels of fiscal and monetary action being undertaken."
What we question
What is the longer-term inflationary outlook and what does this mean for real estate? There is considerable divergence of opinion over the medium to longer-term inflationary potential of the unprecedented levels of fiscal and monetary action being undertaken as a result of COVID-19. The outcome in part will depend on the shape of recovery. A strong ‘v’ shape could mean that rather than the government and central bank actions being just protective of the downside, they translate into actively stimulating economic demand. With a different shaped recovery, the considerable government and central bank actions target the severity of recessionary effects but don’t necessarily stimulate the economy enough to generate demand pull inflation. However, cost push inflation could still be possible due to continued trading frictions and social distancing measures. In an inflationary environment real estate can act as an inflation hedge.
How will investor types and nationalities change? Q1 2020 US investment into the UK was the highest quarter on record with £6 billion transacted, we question whether shifting currency hedging benefits and transport frictions will change this US dominance? Will continued low oil prices spur Gulf real estate investors to search for income abroad? How might possible quarantine periods and ‘travel bubbles’ shape nearterm transaction activity?
What will be the impact on pricing? Could we see a bifurcation in pricing between core, income producing assets and others? Will transactions pause rather than pricing shift, as was seen during the Italy-European Union budget row of 2018, when for a time, 10 year-government bond yields were above prime retail yields in Milan? When could we see distressed assets reach the market? Will this be only once government support is unwound?