psd’s view of the Real Estate Sector going into 2022 – An Article by Peter Hardy, Managing Director
The real estate sector as we go into 2022 is in a much stronger position that it was at the end of 2020. Reviewing the main factors that are influential in the direction and performance of the sector makes for interesting reading.
Looking at a number of differing reports and articles provided us with the following conclusions.
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UK Economy
National lockdowns (including the threat of more of them) have meant that the UK economy will now not recover to pre-pandemic size until at least end-2022, possibly longer as COVID-19 is here to stay. We have seen a consumer-driven recovery, with retail sales already having recovered strongly. A combination of low interest rates, low inflation, powerful fiscal stimulus and the resolution of Brexit uncertainty (although there is yet more of this) will support the recovery. While real estate has had a pretty subdued 2021, a good medium-term recovery is on the cards.
Industrial
As for some years, the industrial market has provided above average returns with more investment going into the field as operators are able to enhance returns with strong asset management and very strong customer service to their wide ranging tenant base
Offices
Office take-up will remain below par, but some more hyped sectors such as Life Sciences will be of greater interest. Equity targeting the key central London Office market will remain high and there seems to be some quite heavyweight demand. Flexibility in employee working conditions will be a big theme for 2022 and onwards, but the trend of smart office use and space efficiency seems likely to remain a big driver in the sub-sector.
Retail
COVID-19 savaged an already-weak UK high street suffering from high costs, and indeed, pressure from Europe’s online retail markets. Although some retail formats have proved resilient (supermarkets, retail parks and warehouses), the sector has been forced to think smartly about its future. Recent results of total sub-sector performance has given plenty of encouraging noises. However, for real estate investors, the refurbishment and redevelopment of assets to different uses is an attractive option.
Logistics
Money continues to pour into this sector. It is smart urban logistics sites that has caught the eye. It has become important to ensure that cities and urban areas optimise their overall logistics performance and minimise associated adverse impacts such as congestion, noise, air pollution and carbon emissions. Urban logistics will also be critical for businesses as they seek to roll-out additional local depots in support of more demanding customer service levels and requirements to operate sustainably via, as an example, all-electric delivery vehicles. For investors, urban logistics real estate that can provide the right buildings in the right locations will offer superior investment performance.
Of course the major logistics market remains hugely attractive and the major player such as London Metric, Tritax, GLP and several others continue to produce highly attractive returns and they hone their portfolios, invest shrewdly and continue to raise suitable finance.
Residential
Residential property has been the surprise outperformer during the past year. Investment levels into institutional rented property have been sustained and will hit new records throughout the next few years. Fiscal support for the owner-occupied market has maintained prices and transaction levels and that looks certain to continue until end 2022. Demand for site labour is extreme as the since Brexit and COVID-19, the number of people in the construction field has dropped.
Build to Rent
Investment in Build to Rent (‘BTR’) has grown following the record levels invested in the UK over the past 24 months. The market is evolving from urban high density product for young professionals to rental homes for all life stages, with investor activity in 2021 and 2022 shifting towards single family rental housing in the suburbs and beyond. BTR is continuing to show resilience and the much enhanced professional management of the sector means it will continue to see rental value outperform that of the wider buy-to-let rental market where small investors are gradually finding their margins squeezed.
Affordable Housing
The supply of social rented homes fell by 210,000 in England in a nine year period between 2012 and 2020. Despite 70,000 new social rented homes being built, over 280,000 have either been sold, converted to higher rents, or demolished since April 2012, creating a net loss of 210,000. The two main reasons are right to buy sales (121,000) and conversions of letting to higher rents which, it may be argued are not ‘affordable’. The situation is set to get worse but of course this means that large scale investors are increasingly attracted to the sector as it matures and more money is pumped into it. The government has promised over 30,000 new social rented homes outside London but this is not the mouth-watering prospect that it might seem, as the figure for the previous five year period was pretty much the same.
Leisure
As with retail, the UK hotel and hospitality sectors had a rough ride in both 2021 and 2022 with operators and landlords forced into much closer collaboration in order to survive. The need to adapt to the weaker economic outlook, ferocious competition, and to maximise efficient use of real estate has seen pubs, leisure facilities and hotels start to recover strongly with the demand for real estate expertise central to that recovery.
Peter Hardy
Managing Director – Property & Construction
Peter leads psd’s Property & Construction sectors, specialising in senior leadership and board level roles across Developer, Private Equity, Fund Management, Affordable Housing, PRS, Later Living and Student Accommodation organisations.