After the turbulence of the past two years, there is increasing optimism about the prospects for UK real estate in 2022. With high vaccination rates, lockdown restrictions easing and much of the workforce returning to work, the light at the end of the tunnel appears to be ever closer.
The UK looks poised to recover from the pandemic ahead of many other European markets. The IMF and OECD forecast UK economic growth will outpace that of most other advanced economies in 2022.
The property market is in a strong position, with pent-up occupier and investor demand waiting to be unleashed, which should deliver strong growth in key areas.
Although questions remain about the future of the office, occupier demand in major cities should remain strong. The pandemic has introduced more flexibility into working patterns, but employers and employees alike have also recognised the importance of face-to-face contact with colleagues and partners. Space for collaboration and connection, as well as strong ESG credentials, have become tenants’ priority. With prime office supply limited in many areas, this flight to quality will create upward pressure on rents for the best stock.
Meanwhile, in the logistics market, take-up has risen to record-breaking levels, driven by a number of factors. Retailers sought to keep up with demand for online shopping during lockdowns, while businesses sought to tackle supply chain disruption by onshoring more stock. This, combined with trends like demand for last-mile logistics and smart-tech integration, should drive demand for quality space even higher in 2022.
Other key sectors should also experience a boost as the economy opens up. For example, in the UK’s world-leading UK life sciences sector, there are opportunities to repurpose older stock to meet lab space demand in cities like London.
While retail remains challenged, there is value to be realised in assets that incorporate leisure experiences, or where customers prefer to try before they buy, such as furniture and homewares.
A number of long-term trends will deliver value for investors in the UK versus other markets. First, the impact of Brexit has not been as severe as initially feared, but concerns remain ‘priced in’ to UK assets. So the UK is a more attractive investment destination, offering relative value compared with Germany or France.
The UK is also the most mature, deep and liquid market in Europe. These strong fundamentals are supported by an investor-friendly environment, with a transparent financial and legal system. An expanding population and urbanisation offer investors a unique opportunity to take advantage of sectors such as offices, hospitality and leisure and last-mile logistics.
Finally, Cambridge University research has revealed that between 2001 and 2019, country-specific funds outperformed generalist funds, citing the importance of proximity and the information advantage of ‘local players’ on rents and prices paid. Given the strong dynamics of the UK market, coupled with its bounceback potential, we expect investors to invest record amounts in 2022.
Manish Chande is senior partner at Clearbell Capital