Sitting here in August I do feel a touch of déjà vu, as this time last year many pundits were suggesting that a return to normality and normal markets would happen in September 2020. Whatever does happen, I think that there are three key themes that will be prevalent in the UK’S commercial property markets in the back end of this year.
1. Continued uncertainty around the return to the office drags on the occupational markets, but investors place bets on quality
None of the high frequency data so far suggests that there has been a rush to get back to work since 19 July. Corporate announcements from the world’s largest service sector businesses are more around vaccination strategies and a delayed return to work than a hard return in September. Major companies will need three to six months' data on new working patterns and behaviour before they can make informed decisions to downsize or upsize, and this will mean that office leasing markets will remain quieter than normal through the remainder of this year.
Office development and investment activity will recover more strongly over the autumn, with developers betting that ‘green’ and ‘prime’ will remain sought-after. While offices might not be many investor’s top pick, the sheer volume of equity searching for comparatively long lease lengths will drive a very typical recovery in office investment.
2. Profit-taking accelerates in the logistics sector
The last five years has seen around £25 billion of extra capital enter the UK logistics market, and over the same period prime logistics yields have hardened from around 6.0 per cent to 3.5 per cent. The capital gains that this implies will be too attractive for some investors to ignore, and I think this autumn will see a surge in sales of single assets and portfolios as developers, early adopters and aggregators look to book some profits.
This doesn’t imply that a turning point in pricing is coming, but a plateau is probably imminent.
Where will the equity that is released go? Some will head back into logistics development, but some will also boost activity in the office, retail and multi-family sectors.
3. Increasingly keen on green
With the world’s standard bearers of sustainability descending on Glasgow from October there can be no doubt that environmental matters will be at the forefront of many investors’ minds in the second half of 2021. Behind the plethora of pontification that will inevitably ensue will be a continual increase in the sophistication of the debate around the built environment and environmental matters.
82 per cent of the office developments in central London that have recently pre-let have (or are targeting) a BREEAM rating of ‘Very Good’ or better, and there can be no doubt any more that this is what large, forward-looking occupiers want. A similar story will strengthen about what is saleable to global institutions, and this should finally end the slightly spurious debate about whether tenants will pay more for ‘green’ spaces.
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