Tuesday next week will mark a year to the day that Boris Johnson announced the UK would go into full lockdown in a bid to curb the COVID-19 pandemic.
It seems unbelievable that a year later we are still in a lockdown. The successive lockdowns have hugely impacted the property sector – mainly negatively (as in the case of non-essential retail, leisure and hospitality), with a few bright spots (like logistics).
Optimism has heightened that a viable roadmap to economic recovery exists, mainly due to the vaccination programme.
As we (hopefully) move safely out of lockdown and the economy picks up, what will the future of real estate look like?
Well firstly one should start by pointing out that a lot of the turmoil in the retail sector has been caused by a pre-existing trend that has been accelerated during the pandemic. Namely online retailing.
The big question remains, will people return to the high street in any great number and the rate of online shopping drop? There may be some tail off or plateauing of the growth in online retailing post-lockdown, which stood at 36.3% of all retail in January 2021 versus 19.1% in February 2020, but the general consensus is that a lot of that will stick.
This will have huge implications for shopping centre owners and high street retail. Rents on shops that had been on an upward trajectory for decades will continue to be re-rated and the impact on values is frightening. Retail owners are scrambling to convert unwanted space into alternative uses, but this is not a quick or cheap process.
Not all retail is equal, however. One retail sub-sector that seems to have been tarred with the same brush as the wider retail sector is retail parks. Values have fallen in this sector much in the same way as malls. However, demand fundamentals are completely different.
If you look at the type of tenants on a retail park, they tend not to fall into the struggling non-essential retailer category. The two German grocers Aldi and Lidl are growing quickly and looking to occupy space on retail parks. Discount retailers like Home Bargains and B&M are growing too, while pet stores, which have thrived during lockdown, also frequent retail parks. Fashion retailers like Next are seeking out space on retail parks, at the expensive of high street locations, due to click-and-collect credentials.
While values have fallen in much the same way as shopping centres, retail parks should recover quickly post-pandemic as demand picks up. Ediston Property (EPIC) is in a strong position to benefit from this, with a large portfolio centred on new retail parks, let on sustainable rents.
Just as not all retail is equal, the same can be said of logistics. The tailwinds in the sector are well hashed, but I feel some caution should be attached to it. The hype surrounding the sector has seen investment volumes soar across the board but it feels like the fundamentals of real estate investing have been thrown out the window by some.
This has been to the benefit of some of logistics REITS and some of the property generalists that have significant weightings to the sector, which have taken the opportunity to crystalise profits on some assets that may not have long-term growth potential.
With investment yields compressing in the sector, and extremely positive demand-supply fundamentals, the returns on offer through development is where I believe the opportunity lies in this sector.
The two Tritax funds, Big Box REIT (BBOX) and EuroBox (EBOX), have a strong focus on development, while Urban Logistics REIT (SHED) is now increasing its focus on developments.
I’ve saved the biggest unknown to last. The debate around the future of the office is still raging. Although the overwhelming consensus is that people will not use the office as often or in the same way as pre-COVID, what this means for the office is less clear.
Businesses will still have a shiny HQ office and will continue to need attractive space to appeal to talent. They just may not need as much of it. This, I believe, will have a bigger impact on the older, poorly located offices than on prime offices.
There is likely to be a flight to quality that will benefit the likes of British Land (BLND), Great Portland Estates (GPOR), Derwent London (DLN) and Helical (HLCL), which all have quality portfolios in London. Rents are expected to stall from an overall drop in demand, however, supply of office space has been at historic lows for a while. Permitted development rights allowing office-to-residential conversion and development caution will limit supply.
Although there will be less people in the office, space per employee is likely to increase to meet air quality that is likely to be demanded by employees. Wellness is shooting up the agenda, and staff facilities such as break out space, yoga/exercise space and bike storage are likely to increase in importance. The net loss of space due to working from home practices could be minimal. Standard Life Investments Property Income Trust (SLI) has been future proofing its offices for a long time, putting amenities at the top of its priority list for offices.
Much is still up in the air when it comes to the roadmap out of lockdown and the economic recovery, but the past year has given some indications for the future of real estate.