SPR/IPF Webinar Outlook for UK Property 2022 
10 January 2022 

Introducing this start of year showcase event, Chris Perkins of M&G noted that UK property performance in 2021 had turned out much stronger than many dared to expect, with a mid-teens total return buoyed by the industrial sector and some parts of retail.  Meanwhile trading volumes had proved robust at around £55 bn, a similar figure to that seen in 2019. 

But what lies in store for 2022?  Liz Martin of HSBC painted a generally bullish picture of prospects for the global and UK economies, with the V-shaped recovery of 2021 set to bed in and advanced economies (in aggregate) even promising to exceed their pre-pandemic forecasts - such has been the effectiveness of government interventions. For the UK, pent-up consumer demand resulting from higher saving during the pandemic means there is potential for a big boost to spending, while confidence appears high despite the dampener of Omicron. 

However, there are a number of risks as well. Supply bottlenecks in both materials and labour are holding back economic growth across the developed world, even if there could be compensation in the form of a later catch-up.  These bottlenecks are also contributing to inflation, which look set to squeeze real incomes over the year – wages would probably have to rise by 6% to negate this effect, well above what they are forecasting.  Working from home has also proved to be a double-edged sword: although it has allowed people to keep working though the pandemic, its continuation means less activity in transport and hospitality, for example.  And Brexit is undoubtedly exerting a negative impact, with UK exports and manufacturing output recovering much slower than in the Eurozone. 
Will Nicoll CIO of M&G private and alternative assets then took a multi-asset approach to the investment landscape, stressing that while government bail-out policies through the pandemic had given consumers a high level of solvency, the excess liquidity already seen in investment markets pre-Covid had now been ‘turbocharged’.  Given that equities have already had a strong run and bonds are providing negative real income, real estate is likely to continue in favour for investors, especially as the wider ‘alternatives’ sector is establishing a permanent uplift in multi-asset allocations.  The illiquidity premium to real estate has also clearly grown, though this could decrease if it becomes easier to transact within the asset class, say via tokenisation. 

What of the return prospects for UK real estate sectors?  Andrew Jones of LondonMetric proposed that much will depend on how the structural trends accelerated by the pandemic continue now play out, as these are having divergent effects for different parts of the market.  ‘Beds, sheds and meds’ have clearly moved into the ascendancy, but there are also parts of the retail and office markets that could fare relatively well.  Occupational demand remains very strong for logistics, so that low yields can be justified by the prospect of continuing rental growth – for instance an average 6-9% is predicted for London over the next five years.  Warehouse occupiers may also need more space due to growing inventories as ‘just in case’ comes to supplant ‘just in time’ if supply chains continue to be threatened by geopolitical disruption, for example. 

In a wide-ranging Q&A session, Jones suggested that he would be looking for a ‘copper-bottomed’ 7% return from his real estate investments going forward, though this was more of a long-term target than a forecast for the year to come.  Repurposing assets from one sector – especially retail – to another was set to be a growing trend, not only for urban logistics but also health and education.  Asked if retail was itself on the point of becoming an ‘alternative’ property sector, Nicoll proposed this was unlikely, as there is still too much retail in investment portfolios and it is not yet cheap enough.  But perhaps most intriguingly, Martin accepted the premiss of one questioner that consumption patterns be weaker in the future as the climate agenda takes hold – although there is likely to be a return to pre-pandemic levels of demand in the short term. 

Tim Horsey