In terms of any return to risk, 2025 is the year on the horizon for Simon Heilpern MRICS, the head of real estate at the Salamanca Group. By then, Brexit and the coronavirus should be memories rather than thorny realities, with the post-COVID-19 world benefitting from growth in advanced technology, and “new world” growth driving demand for real-estate sectors such as data centres and warehousing.
Demand will be strong there, as well as in industrial and even residential. But prospects are gloomier for office space and retail. Both are suffering from a lack of demand and changing patterns of consumption and work. Development and land banking are risky prospects, best reserved for developers with the right financial backing and suitably low levels of leverage.
“I am bullish on industrial/logistics, although at the prime end in London and the southeast, rents have become unaffordable for some traditional occupiers,” says David Wise MRICS, co-founder and managing director at Active Value Capital. “There is capital for this area of the market as it’s viewed as relatively safe and away from the travails of retail and offices.”
Buyers of real estate should beware the buyer of goods. “I fear for the retail sector, and in particular the shopping centre and town centre,” Wise continues. The sector is being hit by “wave after wave” of company voluntary arrangements (CVAs) and insolvencies, “and even where tenants are trading well many are not paying rent. This is compounded by poor investor sentiment.”
The rest of the UK’s commercial property market had better play defense. Recovery for sectors that have experienced a sudden drop in demand may not see that return for years. Office space in particular faces increasing vacancies as companies grow comfortable with more employees working from home, which will place downward pressure on rents. That in turn makes it hard to envision significant value gains.
“When capital growth is challenged, it is all about income and servicing of debt,” Heilpern concedes. Assuming loan-to-value ratios are “sensible,” he would be “buying in high- quality income at sufficiently attractive risk-adjusted yields”.
Investors should position their portfolios accordingly. They will likely require short- to mid-term strong income-producing assets “to bridge this current dislocation”, Heilpern believes, matching liabilities and cash requirements over three to five years.
Wise notes a wrinkle in identifying defensive assets. The UK government has agreed moratoriums on rent as well as CVAs, which allow companies to renegotiate their debts if 75% of creditors agree. That undermines the value of long leases, since the projected income may not come true.
Brave investors stand to gain by entering riskier sectors, where there’s less demand, and less competition from other sources of capital. Assets are currently flowing into defensive plays, which drives down already-low returns.
Wise is marginally more optimistic about when “risk will return”, hazarding that it will be at least until 2022, and possibly longer, before that occurs.