With some major hurdles likely to fall in 2021, Schroders believes that certain parts of the UK real estate market are at a turning point and set to perform strongly over the next few years. Mark Callender, Head of Real Estate Research at Schroders shares his thoughts:
The past five years have proven a bumpy ride for most markets, but the UK real estate market has endured a particularly difficult time since 2016. Following Britain’s vote to leave the EU, investment shrank materially, with international capital focusing instead on destinations like Germany and France.
However, the Brexit trade deal last December may prove a turning point. It has clarified the future relationship between the UK and EU and removed a lot of the uncertainty around sterling. At the same time, the rapid roll out of Covid-19 vaccines in the UK means there is real hope for a strong economic recovery in the second half of 2021.
Here we discuss why we are optimistic on UK real estate, why we expect it to attract capital, and which specific sectors we favour.
What is behind our optimism? Two key drivers.
1) UK economic recovery as Covid-19 worries fade
The UK is forecast to be one of the fastest growing economies in Europe over the next five years. The recovery looks likely to be led by a strong consumer and a recovery in investment, as we gradually start to put the pandemic behind us.
The UK has been quicker than other European countries to roll out vaccinations. The government plans to vaccinate all adults over 50 years old, health workers and vulnerable people by the end of June 2021.
Restrictions on visiting non-essential shops, pubs and restaurants may be relaxed over the summer. It is estimated that UK consumers – stuck at home during lockdown – have accumulated an extra £100 billion in savings and the second half of this year should see a sharp increase in spending. The Bank of England, meanwhile, is likely to leave interest rates on hold at 0.1% until at least the end of 2022.
2) Brexit trade deal reduces currency risk
The Brexit trade deal with the EU has reduced currency risk for international investors. As a result, we expect increased capital flows into the UK. This in turn should support a recovery in manufacturing investment, given greater certainty over future trade.
For example, soon after the trade deal Nissan announced that it would switch all production of batteries for its European vehicles to the UK. Likewise, we expect that a more stable currency will reignite the interest of international investors in UK real estate.
The focus of the initial Brexit deal means the impact on services is less clear. But sectors like university education, tech and media – where the UK is strong – should be largely unaffected. This should have a positive impact on clusters in cities like Manchester and London.
EU regulations mean that London has lost some financial transactions to the continent. However, in the long-term, London should recoup these losses by winning new business outside Europe, particularly in Asia.
The UK economy is also set to benefit from an increase in government investment, after a decade of austerity. One of the government’s main priorities is to kick-start economic growth outside London and south east England. It has announced a number of infrastructure projects to improve transport links between cities in the midlands and northern England. The government is also subsidising investment in renewable energy, particularly off-shore wind turbines, as part of its commitment to cut the UK’s net carbon emission to zero by 2050.