Deal or no deal, 2021 heralds a new beginning for UK real estate, says CBRE

Underpinned by a new political stability, 2021 will herald a new chapter for UK real estate, according to predictions made in CBRE’s 2021 UK Real Estate Market Outlook. Despite the high political drama of recent days, Brexit will rapidly fall away as the biggest source of change and uncertainty for real estate in 2021, with attention turning to other issues.

Miles Gibson, Executive Director, UK Research, and the editor of the report, comments: “Deal or no deal, 2021 will find us in a settled new relationship with the European Union, after five years of debate, division and uncertainty. We will not quite have left the COVID-19 winter behind, but the shape of that exit will be much clearer. Brexit will rapidly recede into the background as a pre-occupation, as new issues emerge for UK economics, politics, society and real estate.”

A weaker real economy will induce lower and even negative rental growth in 2021, although some sectors – notably logistics and residential real estate – will dramatically outperform. In the investment market, long-term interest rates are at record lows and there is an abundance of capital looking for a return, which will help to support a recovery in commercial property investment. Even during the pandemic, commercial property yields have not increased significantly demonstrating the continued attractiveness of real estate in the current environment.

Steven Newlands, Executive Director in CBRE’s Investment team commented: “Investors have held off from UK property investment recently partly because of pandemic-related disruption and the potential for it to induce changes in occupier behaviour. Travel bans and guidelines around social distancing also have also meant investors haven’t been able to view some properties. These concerns, as well as the restrictions, will ease over time for some asset types as the occupier market recovers. For now, investors are focusing on the winners from the pandemic: the logistics sector and other sectors with safer, long-term incomes. For 2021 we expect this to continue as we return to near normal conditions as the vaccine is rolled out.”

CBRE forecasts MSCI UK All Property Total Returns of -4.4% for 2020, but 2.6% for 2021, assuming a Brexit deal is done. Over the next five years CBRE forecasts average returns of 4.4% per year with rental growth of 0.3% per year. In 2021, CBRE expects real estate investment to rise around 30% to £48bn from a projected £37bn in 2020.

For the office sector, investment and take-up is expected to recover steadily as 2021 unfolds after a difficult start to the year. UK Office yields will remain stable despite a notable fall in capital values of around 11% over 2020 and 2021.

Stewart Taylor, Head of CBRE Scotland’s Advisory and Transactions team, said: “Headline rentals held up well in 2020, despite the enormous challenges faced by the offices sector, and while we anticipate a subdued recovery in the first half of the year, the low levels of supply in Edinburgh and Glasgow are likely to underpin a return to rental growth. We are already seeing a flight to quality as employers strive to make workplaces a destination. Certain sectors will see above-average levels of activity with the creative sector benefiting from increasing reliance on technology and life sciences sectors likely to be particularly active, with the pandemic leading to significant increases in funding and investment within this sector.”

For the logistics sector, the pandemic has evidenced its essential role of keeping food and goods moving. The year ahead is anticipated to bring occupier focus on building more resilient supply chains, increasing capacity and diversifying suppliers to safeguard against future disruptions. Restructuring logistics networks will require additional modern warehouse space in the UK and in relation to Scotland should result in funding being made available for speculative development.

David Reid, Associate Director in CBRE Scotland’s Industrial & Logistics team, said: “We expect 2021 to be another strong year for our market in Scotland. The incredible take-up during 2020 has resulted in critically low stock levels and with continued strong demand we urgently need new speculative development to meet the future needs of occupier requirements. We are working with a number of developers to plug this shortfall in supply.”

The retail real estate market has arguably been suffering most as a result of the pandemic. However, this sector above all others has also experienced a dramatic acceleration of trends already present in UK retail prior to the pandemic.

Kevin Sims, Senior Director in CBRE’s Retail team, said: “We are confident and hopeful that retail will recover in 2021, especially during the second part of the year when consumer and retailer confidence should be at increased levels. The ongoing structural transformation of retail real estate will continue, with occupiers and landlords needing to work more closely together than ever to find a deal structure that is sustainable for both parties. Whilst online penetration will continue to grow there will still very much be a place for a physical store network.”

CBRE expects online retail will account for 30% of all retail by the end of 2025.

Miller Mathieson, Managing Director for CBRE Scotland and Northern Ireland, concluded: “The property sector as a whole has been remarkably resilient in 2020, and despite ongoing disruption from shorter-term issues arising from the pandemic, 2021 represents a new beginning for Scottish commercial property. The sector will be breathing a very large collective sigh of relief that major uncertainties which have hampered investment and activity are now behind us. With change comes opportunity, and the trick for the informed decision maker is to identify those opportunities now.

“In Scotland we will have many opportunities and challenges in common with the rest of the UK. In particular we will see significant activity in the logistics sector as values improve and new speculative development becomes viable. This is the favoured sector of investors and Scotland still has major growth potential. Similarly, I think we will, at last, see Scotland embrace all the different forms of residential investment around affordable housing, build-to-rent and co-living.

“Our biggest challenge will undoubtedly be in the retail sector with the continued growth of online sales and the increasing number of CVAs and administrations. There are lots of positive initiatives about the future of our town and city centres but I am of the opinion that 2021 will be the year when the sheer scale of this challenge finally dawns on everyone.

“In Scotland the industry is also forward-looking with the themes of environmental and social governance coming to the fore along with zero carbon targets. We are already seeing new developments incorporating improved technology to enhance the working environment and make it safer for employees as well as greener for the environment. This will be essential if the industry is to meet the demands of future occupiers and investors.

“Finally, after the uncertainty caused by both the pandemic and Brexit, it would be nice to think we will have some political stability for a while in 2021 however I suspect this is one wish that will not be granted in Scotland.”