The UK commercial property market will accelerate in 2021 more rapidly than expected due to rapid recovery in investor confidence against a backdrop of greater certainty about the pandemic’s path. Improved EU/UK relations, and a healthier economic backdrop as consumer spending returns, supported by pent-up demand from household savings, will also contribute to preventing a double-dip recession.
UK commercial property pricing will remain generally stable with further yield compression in prime long income market segments across London and the UK regions, notes Colliers. Investment volumes will bounce back to 2018 levels and should reach £60 billion in 2021. Activity will be buoyed by cross border investors looking for yield and security, as well as by UK institutions, as a year of redemption pressure and gating gives way to new fund inflows.
John Knowles, head of National Capital Markets at Colliers International, commented: “Every time we thought that we were going to see a recovery in investment volumes this year, something came along to dash our hopes. We are now looking forward to a sustained recovery in 2021, predominantly driven by appetite for long term, defensive assets. This will be mirrored in the debt markets with asset classes including logistics, build to rent and student housing being among the most popular. Activity from overseas capital will supplemented by institutional demand on the back of renewed investor confidence and fund inflows as we continue through the year. Debt costs for prime stock will fall as more capital competes for fewer high-quality opportunities in a benign official rate environment, but we will see opportunistic funders build margins in other areas.”
Industrial & Logistics
Looking at the industrial sector, 2021 is set to see the take up of large distribution warehouses (100,000 sq ft plus) exceed the five year average of 30 million sq ft. Amazon is set to be less acquisitive, but the gap will be filled by an occupier race to upgrade and future proof their stock. Large scale (500,000 sq ft plus) design and build pre-lets will increase to accelerate the ongoing supply/demand imbalance. For many logistics occupiers and developers, the focus will begin to become more port-centric as new international trading relationships arise.
A rise in consumer confidence and demand will help the recovery take place at a quicker than expected pace. The retail sector will remain blighted by too much space, but there are pockets of the market that will remain popular with both investors and occupiers. Occupational demand will be led by discount food, homewares, discounters, sports and ‘brand statement’ stores. Colliers expects there to be continued pressure in rental values across shopping centres, high street and out of town locations particularly when the business rates holiday comes to an end in April 2021. For investors, supermarkets are the retail asset of choice, however it is unlikely there will be further yield compression. Retail warehouses will continue to be popular, but the fortunes of shopping centres are segmented between sustainable and non-sustainable assets, which can be repurposed.
London office take up will remain 15 per cent below the 10-year annual average in 2021, despite a strong recovery in the second half. According to Colliers, London’s vacancy rate will peak at 10 per cent in H1 2021, falling in H2 but remaining above the long-term trend (7 per cent) as obsolete space comes to the market next year. A surge in demand is expected once certainty returns to the market and this will be driven by appetite for high quality products with upgraded Cat A+ digital infrastructure, good transport links and amenities.
It is expected that headline rents will fall in H1, but then rise in H2 next year, showing only a minor reduction during the year. Demand will support headline rents in regional cities, with little movement expected. The demand for flexible space and lease terms will create additional support to rental levels states Colliers.
In the residential sector, the Government may well announce an extension of the stamp duty holiday and new high loan to value (LTV) mortgage support for first time buyers in the March budget. The build-to-rent and private rental sector will remain grounded in strong support from domestic and international funds and Colliers expects the lower residential transactional volumes in H1 to be balanced by a boost in H2 2021 as pent-up demand is released in the wake of greater political and economic certainty. UK house prices are set to grow by 4 per cent in 2021, driven by renewed interest in family houses with gardens in the South East.
In the hotel sector, the domestic market, led by sporting and cultural events, will lead the recovery in H1 2021 supplemented by a return of the international market in H2 2021 as travel restrictions are eased. A full occupational recovery is expected in 2022 and Colliers expects profitability to return fully to pre-pandemic levels by 2023. Investment transactions will accelerate from Q2 2021, but distressed hotel sales will remain limited due to ongoing bank forbearance.
Walter Boettcher, Head of Research and Economics at Colliers International, added: “Next year will hopefully bring a dose of certainty and the end of an era of unknowns. The conclusion of Brexit and the distribution of a COVID vaccine will restore confidence in the property sector and see investors and occupiers alike become more determined in their decision making. Investment should bounce back more quickly than expected and will be driven by overseas investors and return of UK institutional investors. Already equity funds are seeing renewed investor fund inflows.
“Regional activity levels across occupier and investment markets will also accelerate as the log-jam in decision making is finally cleared. Regional confidence should also strengthen as Government infrastructure investment plans begin to materialise and the location of the new National Infrastructure Bank is announced.