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UK Cross Sector Outlook 2022: Comparative returns

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A shift in priorities

What are the prospects for residential developers? How will hybrid working impact commercial occupiers? We review the performance of asset classes and how it could influence investor behaviour.

1. RURAL REBOOT

Our chart on the comparative returns available from different asset classes has been revised somewhat from last year. In 2021, forestry was top of the pack. Commercial forestry has outperformed expectations for several years in succession, mainly due to the rise in values of existing forests. Values are, however, very full in this sector, and whilst it is not clear if we are at the top, high valuations means that short-term asset performance is subject to a degree of uncertainty, albeit against a backdrop of sound long-term investment fundamentals.

The strive for net zero solutions and desire to plant new woodlands for carbon sequestration means we have replaced commercial forestry in the forecast with low productivity livestock land as this is where most investment is likely to be targeted over the short to medium term. More generally, greater certainty around future agricultural support means expectations of capital growth have returned for arable land where values will continue to be more closely linked to its productive capacity.

 

2. INDUSTRIAL REVOLUTION

London industrial now sits at the head of our list, with distribution warehouses not far behind. This reflects continued demand for last mile delivery and the rise and rise of internet retailing that appears to have become more entrenched as a result of the pandemic. With finite stock available to meet this need in the capital, prospects for continued rental growth underpin an expectation of double-digit annual returns. That comes at a time when the fundamental drivers of demand for other commercial asset classes are in a state of flux.

3. GREENER FUTURE FOR OFFICES

The prospect of the demise of the office has, in our opinion, been substantially overstated, but the shift to hybrid working patterns is likely to temper returns available from both regional and London offices. Here, we expect the ESG credentials of those offices to become increasingly important over the next five years, but any differentiation in rental and capital values is only expected to occur over the longer term.

 

London industrial sits at the head of our list, with distribution warehouses not far behind. This reflects continued demand for last mile delivery and the rise and rise of internet retailing

4. RETAIL DIVERGENCE

From a retail perspective, we expect to see a divergence in the performance of shopping centres – which now sit at the foot of the table – and retail warehouses, where strong income yields underpin competitive returns despite modest capital growth prospects. Across the sector as a whole, we believe there will be opportunities for investors to pick up mispriced assets, the emphasis on stock selection being more important than ever.

5. RESIDENTIAL REVIEW

In terms of residential property, the surge in house prices in the wake of successive lockdowns has tempered price growth prospects, especially in an environment where we expect to see interest rates gradually rise. But, again, this market is anything but one-size-fits-all.

The highest yields and strongest price growth prospects continue to be found in the North, Scotland and Wales. In London, we expect to see a substantial difference between the domestic mainstream market and that of prime central London, where travel restrictions have put on hold a long-overdue recovery.

But while we anticipate ongoing pressure on private landlords from regulation, we expect to see institutional investment into Build to Rent and purpose-built student accommodation (PBSA) to continue to flourish. This will deliver secure long term income, in what we expect to be a much more diverse sector as it continues to mature quite rapidly.

 


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