July’s very marginal downward shift in average prime yields picked up some pace last month, coming in by 4 bps to 5.09%. This was driven by Retail Warehouses (restricted) and City Offices, both of which saw yields come in by 25 bps. We could see this downward trend continue over the coming months, supported by stronger confidence as economic conditions improve. For example, three sectors mooted further downward pressure on yields.

While rising inflation is currently grabbing the headlines, the direct read through to pricing could be minimal, as property values have a much stronger link with economic growth. Rental growth has benefited from the strong economic recovery in many sectors, albeit tempered by structural change in retail and offices. Having said this, higher inflation will mitigate rental growth in real terms although we believe this will be relatively short-lived. Oxford Economics forecasts that inflation will come back to 2.0% by end of 2022, albeit after a rise to 3.5% before the end of this year. This concurs with the MPC’s view that inflation will settle back to 2% in the medium term. Rather, it would be a return to rising Bond yields that could temper future yield compression, albeit the current spread is generous enough to absorb higher rates over the short term.

What is the current sentiment around the office?

Savills Office FiT was launched in response to the Covid-19 pandemic exploring if and how views and preferences on the office have changed in response to the pandemic. The key questions being debated are how do workers feel about the return to the office and where are specific tasks best undertaken. In the most recent survey in July, 86% of UK survey respondents believe the office remains essential for successful business operations post-pandemic. This is in line with the 89% recorded at the start of the pandemic, suggesting attitudes towards the office have remained broadly consistent over the last 12 months.

Employers will however need to manage new working preferences. For example, 54% of respondents feel that their mental health is best fulfilled by working from a combination of both the home and the office. Similarly, 48% of respondents feel that their personal growth is best facilitated by working from a combination of both. Working from home can be a positive component of the work-life mosaic, but the workplace remains an essential environment for employee growth and learning as well as key to supporting and maintaining the culture, community and an organisation’s brand.

The office is important, but equally so is its configuration. Additional work settings, collaborative spaces and virtual communications must all be taken into account with appropriate space allocation.

Ultimately, the leadership rationale for decisions made about the office should be communicated to the workforce – if people understand the ‘why’, they are more likely to accept change. Employee preferences must be balanced with business demands. Whilst there may be a perception that these two aspirations are different, our survey indicates a broadly consistent response between managerial and non-managerial employees. Ultimately, effective communication between employer and employee is vital.

Inflationary pressures facing the wider economy is nothing new to the hotel sector. Even ahead of Brexit the sector was seeing rising costs across the board, most notably in terms of wage costs due to staff availability issues. The pandemic has exacerbated these staff shortages particularly as the economy has reopened. Savills Hotels carried out an operator survey to look beyond the headlines and better understand these challenges and what it could mean for lenders and investors. Headline results are that 83% of respondents expect to experience a shortage of staff over the next 12–18 months. In response, respondents believe these shortages could culminate in a 12% increase in average wages, with housekeeping and F&B (food & beverage) functions most exposed. However, these impacts vary significantly across hotel departments, hotel segments and regions.