This year did not start as well as many had hoped, but there are still reasons for investors to be cheerful about the UK market.
We have led the world in creating a cost-effective, accessible Covid-19 vaccine.
While teething problems with Brexit exist, being outside EU red tape has allowed the UK to vaccinate more people than our European counterparts, and our return to normal life seems to be on the horizon.
There are also positive signs for the property industry. First, the UK offers relative value compared with other major European markets – and the gap between markets is widening. The INREV Investment Intentions Survey shows that the UK is just behind Germany and France as a place for investor capital, while European investors have piled into UK property in recent months. The conviction that London is an investment destination continues to grow.
The UK market’s transparency and liquidity are also attractive. UK real estate has responded better to macro shocks than other markets have. The 2008 recession and current crisis have shown that UK property reprices first, but it is also possible to trade at lower levels during difficult periods.
In the short term, investors can capitalise on distress that presents opportunities for bigger discounts. When the economy fully feels the effects of the pandemic, which is likely to happen when government support tapers off, distressed assets will emerge from bank intervention at cut prices.
This will help bring discounts and improve the relative value of UK assets in the short term.
UK real estate has responded better to macro shocks than other markets have
It will also drive potential for a period of significant UK outperformance in the medium term, once growth returns.
A number of factors point to a brighter outlook for UK real estate. CEBR economists say the economy will be 23% larger than France’s by 2035, in part due to Britain’s growth sectors.
Tech companies continue to choose the UK for their headquarters, with Google even expanding its footprint during lockdown.
Corporates are drawn to the UK by benefits such as a deep talent pool and access to London’s capital markets.
While there has been concern that EU countries may introduce attractive tax incentives, it is not a zero-sum game; our tech sector will grow in tandem with Europe’s, and so will its need for workspace.
Similarly, our financial services industry will continue to flourish. Businesses from across the world prioritise access to London markets for their liquidity.
Regarding Brexit, equivalence with other countries will be agreed in the next few years and could lead to the UK outperforming the EU. With markets pulling more and more businesses to London, quality space requirements will only increase.
Finally, Covid-19 has revealed the strength of our life sciences sector. The government has committed to investing £22bn in the industry by 2025 and capital flows are likely to increase in the coming years.
Opportunities to invest early in the sector abound, particularly in the ‘golden triangle’ of London, Oxford and Cambridge, where we expect to see significant rental growth.
Investors should be optimistic about UK real estate. The UK economy plays a vital role and its strengths will continue to generate investment opportunities.
Manish Chande is senior partner at Clearbell Capital