According to predictions made in CBRE’s 2021 UK Real Estate Market Outlook, the office market is set to pick back up, with a focus on redesign, premium collaboration spaces and Grade A space proving more popular than ever and we can report that UK office yields will remain stable despite a notable fall in capital values of around 11% over 2020 and 2021.
Office leasing activity in regional office markets this year will likely be boosted by the public sector, which could equate to almost 1m sq ft of take-up and we expect the life sciences sector to be particularly active with North West schemes, such as Alderley Park, set to enjoy further success.
While the increase in days worked from home is likely to be higher in the future than it was pre-Covid, lowering aggregate demand for office space, the younger members of the workforce are still likely to want to remain office-based. In a 2016 survey of millennials by CBRE, 79% of respondents indicated that the quality of the workplace played a part in their selection of a job. This phenomenon has driven an increase in demand for new, high-quality office space which is likely to persist post-Covid, with a renewed focus on wellness and ESG triggered by attitudes to health and wellbeing in the workplace.
The extra space required by firms in the short-term in order to comply with social distancing guidelines will provide an additional boost to the flexible office sector and occupiers of all shapes and sizes remain committed to flex, a point proven in our Global Occupier Surveys – when asked what the most in demand services of office buildings will be post-Covid 19, 92% of our corporate clients cited ‘flexible office options’ as the most significant with ‘shared meeting space’ not far behind.
CBRE sees BTR as a major growth sector, and in Manchester more than 70,000 households are due to be living in build to rent accommodation by 2028. The rise of build to rent is driven by three key factors, the population of 25-34 year olds, the student population and economic growth. Manchester hosts the second largest student population in the UK of over 50,000 and has one of the strongest graduate retention levels, where students choose to stay in the city and build careers, providing a perfect BTR target audience.
CBRE Manchester was at the forefront of this BTR growth in 2020 when we completed a deal on the city’s most desirable residential address – a 44 storey building and the tallest build to rent development in Europe, with a £200m acquisition price.
In the investment market, long-term interest rates are at record lows, with the increase in capital looking for a return helping to support a recovery in commercial property investment. Commercial property yields have yet to increase significantly demonstrating the continued attractiveness of real estate even during the pandemic. Furthermore, investors are increasing their allocation to residential, identifying development opportunities both for land and asset repositioning - crucial to showcasing potential across the North. Our capital markets team completed over £700m deals in 2020 demonstrating the resilience of the market.
We expect 2021 to be another strong year for the Logistics sector, which has continued to play an essential role throughout the pandemic. Last year, the sector broke another quarterly record with over 13m sq ft transacted in Q4 in the UK, and in 2021 the sector remains focused on building more resilient supply chains, increasing safety stocks and diversifying suppliers. With strong demand and only 10 months of supply available, prices look set to rise even further and in 2021 we predict capital value growth of 7%.
In the retail sector, if the last six months have proven anything it’s that the need for community is still crucial to happy and healthy lives, and creating vibrant places is now more important than ever to bring people together and boost wellbeing. While current restrictions are creating serious challenges within this sector, we’re confident that in the medium and long-term people will want to get back to socialising, shopping, and being together in well-designed places. The ongoing structural transformation of retail real estate will continue, with online retail at permanently higher levels than before the pandemic and CBRE expects online retail will account for 30% of all retail by the end of 2025.
The hotels and hospitality market has suffered the most from the COVID-19 outbreak, but out of the crisis some positives have emerged. New operating formats have been designed to respond to the unpredictable and rapidly changing constraints and we’ve seen landlords and tenants coming together to help free up supply chains and open up shared facilities to help support the pandemic. In 2021, we expect the closer operator-landlord relationship that has formed will help survive weaker demand and fierce competition within the sector.
Residential property is also forecast to perform strongly in 2021, supported by tax incentives, resilient demand and lagging supply. CBRE forecasts almost continual year-on-year growth in the multifamily (institutional rented) sector, to £6bn in 2025. In the owner-occupied sector, we forecast house prices and rents will remain broadly stable throughout 2021, increasing by 1.0% and 0.9% respectively.
CBRE forecasts MSCI UK All Property Total Returns of -4.4% for 2020 and 2.6% for 2021, following the recent Brexit deal. 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 reflecting the shape of economic recovery.
Overall, the shorter-term issues arising from the pandemic will continue to affect the progress of real estate throughout 2021, though each sector will be affected differently and some sectors will no doubt surpass our expectations. With major uncertainties such as Brexit finally behind us and the discovery of a new and effective Covid-19 vaccine, we hope that the positive changes will continue to bring plenty of new and exciting opportunities for UK real estate.
John Ogden, MD of CBRE’s Northern business