Thematic Keys To UK Real Estate Revitalisation, By Giles King, CEO at Mayfair Capital

The fortunes of real estate are inextricably linked to the economy – in periods of growth, companies expand, and people spend more on property. However, real estate is also innately resilient – buildings are not easy to sell quickly, businesses will always need premises and people will always need homes.

The key to unlocking consistent value in the property sector is to be agile. By understanding the changes occurring within the economy and how it impacts the use of real estate, there is an immense opportunity to generate income.

Stars Align For UK Property

Despite current uncertainties surrounding the pandemic, the UK economy is projected to deliver significant GDP growth over the next five years and should find itself among the fastest growing European countries, underpinned by strong consumer spending trends.

The avoidance of a no-deal Brexit has removed a major downside risk for the UK economy. Business confidence is high, and companies are likely to resume investment after adopting a ‘wait and see’ approach in recent years. Meanwhile, even though a deal with the EU covering financial services remains elusive, the UK has been increasingly diversifying away from finance since 2012, in favour of technology and professional services. Consequently, the risk to overall employment is lessening.

In addition, the UK’s strong early vaccination programme and high vaccine acceptance should unleash significant pent-up consumer demand. Business activity has already recovered rapidly, with all sectors witnessing expansion, as evidenced by the 4.8% growth recorded for the UK economy in the second quarter of 2021.

This provides a firm foundation for increased occupational demand across all types of real estate. In the past, strong real estate performance has followed economic downturns – after the dot com crash of 2000 and the financial crisis in 2008, for example. In our view, UK real estate is poised for a strong and rapid performance rebound in the period ahead.

Aside from economic fundamentals, there is a clear rationale for UK real estate investment. First, the real estate yield spread over gilts is extremely wide. Second, UK property appears under-priced relative to European markets. Brexit uncertainty meant the UK did not experience the yield compression seen on the Continent prior to the pandemic, and for international investors, the reduction in hedging costs over the last 12 months will also make pricing more attractive on a relative basis.

Seeing more than €60bn in investment per year, the UK real estate market is one of the largest in Europe, as well as the most transparent, according to JLL’s Global Transparency Index. This suggests it will continue to see sustained demand.

Prime London city office yields in the final quarter of 2020 remained at Q4 2016 levels and were higher than other major European cities. In contrast, in markets such as Paris, Berlin, Munich and Madrid, prime yields have fallen below Q4 2016 levels, in some cases by up to 80 basis points. Alongside positive economic momentum in the UK, this pricing disparity, lower hedging costs and the lessening of Brexit uncertainty should support yield compression.

Go With The Flow

While economic trends are positive, the recovery will not be universal. The pandemic has hastened structural changes that have been evolving for several years and, as a result, the market is rapidly polarising. This is evident between sectors and within sectors, as shifting occupational demand creates vast differences between locations and assets.

Against this backdrop, pursuing a forward looking, thematically based investment strategy is more important than ever. We have identified five investment themes, dubbed the ‘five Cs’, which we use to determine the alignment of locations and assets to structural changes, enabling long-term resilience. These five Cs are change and disruption, communities and clustering, climate and environment, consumers and lifestyle, and connectivity.

The change and disruption theme captures changes to the way we live and work that are impacting real estate use – including e-commerce, automation, flexible working and the Internet of Things. This theme predicts real estate adaptability will be increasingly important as lease lengths shorten and land use boundaries blur.

The climate and environment theme, which encapsulates the need to address climate change and improve user wellbeing, stipulates successful real estate must mitigate its carbon footprint, reduce waste and water usage, improve air quality and promote sustainable habits.

While technology has reduced distances, individuals have a growing desire to belong to communities. The communities and clustering theme tells us occupier demand will increasingly consolidate on strong clusters in mixed use spaces that foster connections and a sense of place.

Our consumers and lifestyle theme explores the rise of individualism and the need for real estate to tailor its offering to unique user groups and different demographic cohorts. Finally, access to transport, digital and power connectivity will be a critical determinant of assets with enduring appeal, according to our connectivity theme.

The rest of this editorial will be published at a later time.