Low interest environment

A wall of money looking for a yield, added to a wave of increased liquidity in the financial system plus the certainty of a low interest rate environment would normally make for a positive real estate investment environment.

However, these are not normal times. A backdrop of Brexit, economic uncertainty as well as structural shifts in our occupier markets and restrictions on mobility continues to weigh the market down. Debt, whilst cheap, is increasingly difficult to access as lenders look for increased assurances in order to mitigate risk, and there continues to be a relative chasm between buyer and seller expectations.

Despite this, we are nevertheless continuing to see pockets of activity, and a flight to quality. In central London, demand for core stock remains robust as investors become more risk averse, with competitive bidding and some assets trading in excess of asking price. Whilst this is having the knock-on effect of larger value-add stock or assets with letting risk struggling for demand, the relative strength of the core market is encouraging vendors to test the market. We have seen a number of prime assets come to the market, with British Land a notable vendor. In the Big Nine markets, sentiment had been improving prior to an increase in government restrictions, with demand particularly strong for out-of-town assets.

Back to beds

The residential sectors look set to benefit from the fallout of the pandemic on commercial property investment appetite. There has been much more focus on where people live during the Covid-19 outbreak and investing in this looks attractive. The likely exception is Student Accommodation (PBSA) which despite seeing a slew of record deals in early 2020, including the largest ever private property deal in the UK, looks set to suffer in 2021. Investors will wait on the side lines to assess the impact of the pandemic on the nature of student demand and the operation of PBSA assets.

Otherwise these sectors have strong fundamental demographic drivers and attractive risk/return characteristics that are increasingly appealing. Residential property has a long track record of rental value growth and is less volatile than commercial property. Over the past ten years residential rents have risen by 20% compared to 8% for MSCI All Property and the sector boasts a strong rent collection record, adding to its defensive appeal to investors. In line with wider trends, we expect to see an increase in the Suburban Build to Rent Sector.

Caring is sharing

Investment in later living and healthcare assets has been one of the key emerging trends in UK real estate in recent years and this looks set to accelerate in 2021. The UK has a shortage of specialist fit for purpose retirement housing. This, combined with the aging population, makes for a very favourable underlying supply/demand dynamic. The growing elderly population has accumulated significant housing wealth, enabling them to afford to buy or rent specialist retirement housing. With an increased focus on the quality and nature of housing for the elderly in light of Covid-19 we expect to see increasing new entrants into the market and competition intensify.

Affordable housing as an investable asset has also witnessed a sharp increase in investor interest over the last two years and we expect to see more capital deployed into the market in 2021, as it offers a significant social impact opportunity. Regulatory changes that enable For Profit Registered Providers to access grant funding to develop or switch private into affordable housing is attractive as is the ‘virtually unlimited’ demand, identified in the Letwin Review. We also expect to see housebuilders increasingly de-risk open market sale schemes in 2021 with bulk sales to For Profit Registered Providers which are then switched into affordable tenures.