COMMENT The past year has been incredibly challenging and unlike anything most of us have ever experienced. As we approach the anniversary of the first lockdown, the government’s announcement that restrictions can begin to ease is welcome news.
While some of the challenges we have faced for the past 12 months will endure a little longer, the end is in sight as more people are vaccinated and we can start thinking about a return to “normal” life. A Brexit deal delivered in overtime will also hopefully provide the certainty that the market has been craving over the past four years, although we are yet to see how significant the absence of financial services from the agreement will be in this new relationship.
Normal undoubtedly looks different from this time last year but the outlook for real estate and lenders is exciting. The fundamentals remain attractive for private clients seeking to grow their exposure to real estate either via development or investment opportunities, with the current low interest rate environment and the search for income intensifying.
Structural shifts
Working from home has been a necessity for many during the pandemic and we can expect the flexibility people have enjoyed to remain. However, the office certainly still has a place. Businesses and their employees have undoubtedly missed the social interaction and the spontaneous collaboration that comes easily in a shared space. We may see more companies adopt a hub-and-spoke model, with a larger central office and smaller satellite workspaces nearer to where their people live.
Retail was already suffering from structural shifts in consumer habits before coronavirus and has been hit the hardest by government-imposed lockdowns, resulting in the collapse of high street staples such as Debenhams and Arcadia. There is hope that the excess savings built up by consumers during the pandemic, which is estimated at around £100bn by the Bank of England’s chief economist Andy Haldane, could lead into a bounce in retail sales and GDP growth once we come out of lockdown.
However, the long-term headwinds against retail do remain in place and increasingly investors will be looking to repurpose retail into other uses such as logistics, residential and offices; and further valuation falls should make this approach more economically viable.
John Lewis is a good example of a retailer with a willingness to adapt as it looks to turn surplus stores into affordable housing and renting unused storage facilities to gyms, housing projects and other sectors expected to bounce back. Similarly, the Broadwalk Shopping Centre in Edgware, north London, has been acquired for redevelopment with the intention of being adapted for mixed-use with new homes, shops and businesses. Back in 2012 we backed the Sellar Group in its conversion of the existing retail space at Surrey Quays into a mixed-use, community led development and there may be similar opportunities in 2021.
Shrinking market
The residential sector has been the surprise strong performer during coronavirus and is expected to remain a focus of both domestic and international investment. We have seen the continued growth in the build-to-rent sector as well a flight to out-of-town living. London, for once, has been the worst-performing residential sector but is tipped to bounce back strongly over the next five years.
The conclusion of the stamp duty holiday may see the market flatten off and there is potential for decline in areas hardest hit by the virus. We expect to see continued investment in alternatives such as BTR, student accommodation and data centres, which are sectors that are proving increasingly attractive to those seeking reliable, countercyclical income.
Despite the challenges we’ve all endured throughout the pandemic, our outlook is positive. Debt is inexpensive and the market has shrunk, although counterparty balance sheet strength will remain as important as ever. We are undoubtedly still going through a period of change and we won’t return to how things were before, which is why it’s crucial that lenders and borrowers are flexible and communicate well.
William Scoular is head of private client lending at Investec Real Estate
