Uncertainty has weighed on the UK since the EU referendum in 2016, compounded by the Covid-19 pandemic over the last 18 months. This contributed to the UK GDP contracting by 9.9% in 2020, the deepest slump in more than 300 years.
Across the UK real estate market, the negative impact of the pandemic was felt most acutely by owners of non-discretionary retail, office, and leisure assets. Income fell as legislation was enacted to protect businesses who couldn’t or wouldn’t pay rent and amount of empty property grew rapidly.
Notwithstanding these challenges, the pandemic has also acted as a catalyst for change, accelerating trends that were already in motion. The most obvious winner was e-commerce, with 2020 a record year for industrial take-up off the back of a huge increase in online retail sales. In 2021, occupational demand for logistics space has depleted stock levels to new lows. This has opened up opportunities for speculative development of logistics space that meet the operational needs of the burgeoning online retail, third-party logistics, and parcel delivery sectors. Demand is strongest for properties that benefit from high degrees of road connectivity, have larger catchment areas with high levels of disposable income and that meet the needs of an increasingly environmentally and socially conscious world.
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Alongside this, as the government pursues its strategy of “building back better”; a key focus is the delivery of new homes to meet a growing UK population.
At Fiera Real Estate, we believe these new homes will need to come in a variety of tenures, with affordability remaining a pressing societal issue. Urban multifamily rental accommodation has seen significant investment over recent years, with investors attracted by accessing inflation linked rental income in larger single assets. The growing single-family rental homes sector is also likely to play an increasingly important role. It offers the chance for families to rent from professional landlords and offers the chance for institutional investors to access the largest segment of the £7tn UK residential market.
In both logistics and residential, we need to supply space that does not currently exist to meet demand that does. UK property yields will continue to look attractive to investors, with a near 5% premium between the all-property yield and 10-year UK gilts. However, focus will increasingly grow not just on the quality of income but of the underlying built asset.
We all need to address the growing effects of climate change, with the UK targeting net zero carbon emissions by 2050. The UK has the economic power, infrastructure, and geography to be more resilient than many other counties to climate change. Despite this, the effects of a changing climate will be profound, leaving many UK commercial assets obsolete as a result of the cost of improving a poor building performance and/or its location.
While delivering sufficient affordable, well-located and environmentally sustainable shelter is possible, it will require a huge effort across the private and public sectors. With nearly £1tn commercial property in the UK, the potential for value destruction is huge as we adapt to the changing world. The slower property owners are to change, via improved development standards or upgrading the assets they own, the sharper and more painful value destruction could be.
We need to build back, but better.
Alex Price is chief executive of Fiera Real Estate
