UK property predictions: 2021 - Rothschild & Co
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UK property predictions:
2021
April 2021
Offices Investors are already shifting focus towards it,
The future will be a ‘hybrid’ mix of home working but a current lack of supply is frustrating activity
and office working, but the conclusion from at the moment. We expect the development
2020 is that there is still a strong case for the sector to respond to this during 2021.
physical office. Source: JLL
The full impact on the physical office will not Retail
become clear until Q3 2021 when the full return At last, there seems to be signs of positive
to work is expected. news on the horizon in this sector. Consumer
demand held up remarkably well in 2020 and the
Leasing is expected to increase by 25% year on
expectation is that further pent-up demand will
year but will still be 20% below 2019 levels.
boost retail sales in 2021.
Personalisation of office space will become more
UK online sales are forecast to fall next year. This
important. There will be far more emphasis on
is due to the prospect of the vaccine allowing
how employees ‘engage’ with the building.
more people to return to work, reducing home
Vacant space sitting within existing operational working, and increasing consumers’ ability and
portfolios will be re-absorbed as occupiers confidence to visit physical retail places.
realise that there will be pushback from staff to
Other factors such as ‘e-commerce fatigue’ and
get back into the office.
frustrations around fulfilment of deliveries will be
Suburban locations will be revitalised as some an additional tailwind to bricks-and-mortar sales.
companies move away from large urban centres.
It is anticipated that there will be a growth in
In turn, this should have a positive knock-on effect
second-hand sales, bypassing retail altogether
from a food and beverage/amenity perspective.
on platforms such as eBay and Depop.
There will be a ‘flight to quality’. The best
buildings in terms of amenity and transport
provision, particularly in business parks, will Leasing is expected to increase by
significantly outperform the rest.
25% year on year but will still be
Secondary assets in terms of specification and
location will be at risk as occupiers seek to 20% below 2019 levels.
rationalise their portfolios, reducing their overall
footprint to focus on better-quality buildings. Younger groups will drive consumer recovery –
socialising remains a crucial aspect of their lives
The repurposing of retail to office is likely to
and during the pandemic no new sustainable
continue, with department stores an obvious target.
alternatives for socialising and entertainment
There will be greater focus on whether to emerged (with many people now suffering from
refurbish or demolish as the property industry ‘Zoom fatigue’!).
grapples with ‘embodied carbon’ and wider
This pent-up consumer demand will benefit
environmental considerations.
prime retail destinations in particular (although
The imposition of a ‘green agenda’ will be more the definition of prime is being redefined).
difficult in the regions due to greater rental
Retailer distress will continue in H1 2021. There
sensitivity and consequential viability concerns.
will be more casualties as government measures
Life sciences will be a rapidly evolving and recede, but there is hope that Debenhams/
increasingly important part of the office market. Arcadia mark the bottom of the market.Ultimately, COVID-19 has simply accelerated the
required supply-side adjustment. It is estimated
Into H2 2021, a combination of
that there will be 80,000 obsolete shops by economic recovery, vaccine-led
2030 (or 20% of the market).
pent-up consumer demand and
20,000 units have closed already during 2020
and we will reach a balanced equilibrium of a bottoming out of the occupier
supply and demand much sooner than on the
pre-COVID-19 trajectory.
market will lead to a stabilisation
Flexible leases and formats are increasingly
of retail assets.
important for retailer and investor real estate
strategies in an increasingly dynamic market. The digitisation (e-commerce) of retail has been
There is a structural shift towards ‘omni-channel a hugely positive driver of logistics occupier
fulfilment’, increasing the importance of urban demand. In 2020, some 42% of floor space
logistics and last-mile fulfilment strategies. taken up in Grade A ‘big box’ units (100,000+ sq
ft) was directly attributable to e-commerce.
Until a degree of certainty around the occupier
market and operational income is achieved, Rental growth in this sector is forecast to
investor demand will remain subdued, and yields improve significantly during 2021. The greatest
are expected to see further decompression rental growth will be in the best locations
(driven in part by distressed asset sales). with the best buildings. Occupier demand
will continue unabated and specification
Into H2 2021, a combination of economic requirements within the control of property
recovery, vaccine-led pent-up consumer demand investors have now reached a plateau. It is
and a bottoming out of the occupier market will likely that greater automation and the advent
lead to a stabilisation of retail assets. of robotics will have a significant impact on this
As we move through 2021, the retail investment sector, but that is largely within the gift of the
market is forecast to offer some of the most occupier and will not directly affect rental levels.
interesting and accretive opportunities of any In many cities, including London, the supply of
sector – physical retail may have its day once again! logistics land is extremely constrained. The re-
Demand will be polarised to certain locations and purposing of retail may be one way to meet the
sectors. London, the south east and the main growing demand for urban logistics buildings,
university towns and cities will continue to offer a including ‘micro fulfilment facilities’, where
strong investment case, with the primary rationale the final transport leg is typically undertaken
being that the underlying alternative land use by electric vehicles or cargo bikes. In some
potential is accretive. REITS in particular will focus cases, the re-purposing to logistics may provide
on London and mixed-use opportunities. landlords with short-term income while they
consider longer-term opportunities.
Smaller supermarket-anchored shopping
centres, standalone food stores and factory Logistics covers two of the biggest sources
outlet centres will continue to be resilient and of carbon emissions, namely buildings, which
attract interest. contribute around 40% of global carbon
emissions, and transport, which is responsible
Private equity and developers in particular will for a further 20%. The focus of occupiers and
focus on acquiring strategic land (currently developers/investors will shift from optimising
shopping centres and retail parks) in the most the energy efficiency of buildings to reducing
accretive locations. whole life carbon emissions, including the
Source: JLL
application of a ‘net zero carbon’ standard.
Industrial and logistics
The rise of urban logistics will continue. Smart
urban logistics will become increasingly Smart urban logistics will
important to ensure that cities and urban areas
optimise overall logistics performance. There
become increasingly important
will be increasing scrutiny on the associated to ensure that cities and urban
adverse impact of congestion, noise and
carbon emissions. Consequently, strategically areas optimise overall logistics
located urban distribution that provides journey
efficiencies to consumers will continue to be a
performance.
focus for investor demand.
Page 2 | UK Property predictions: 2021 | April 2021In the ‘big box’ market where occupiers are evolve from being predominantly an urban high-
typically large-scale corporate bodies, the density product for young professionals to rental
additional rental level that this will prompt may homes for all life stages, with investor activity
be absorbed. However, there is likely to be in 2021 shifting towards suburban single-family
significant resistance to rental level inflation rental housing.
as a consequence of the green agenda from
smaller and medium-sized enterprises occupying
buildings of less than 100,000 sq ft. The COVID-19 pandemic
The COVID-19 pandemic has highlighted the has highlighted thev critical
critical importance of supply chains, the equally
crucial role of logistics buildings within these importance of supply chains.
supply chains and the fact that these cannot
be substituted in the same way as some
other buildings. Both COVID-19 and Brexit BTR will continue to show market-leading
have elevated the asset class in the minds of resilience and the professional managed nature
investors. Last year saw the highest level of of the sector means it will continue to see rental
take up of Grade A ‘big box’ logistics buildings value outperformance by comparison to other
across the UK, and the second highest level of residential market sub-sectors.
investment into the UK industrial and logistics
The sheer scale of the later living undersupply will
sector. It is expected that occupancy and
spark an investor rush. While reform to social care
investor demand will remain extremely strong
remains an urgent priority, the scale of supply and
through 2021 and beyond.
demand imbalance for care homes and later living
Source: JLL and Colliers
options will remain the main reason for attracting
Past performance and forecasts are not a reliable indicator of future
results. interest from investors, whether new entrants or
for consolidation. There will be clear emphasis on
Residential
development both for later living and elderly care,
Housing transactions will remain down on pre-
with the focus on modern facilities built at a scale
COVID-19 levels until around the end of 2021 in
to drive greater operational efficiencies. Multi-
the face of significant economic scarring. A strong
generational sites also offer investors in other
economy usually equates to a strong housing
‘living’ markets the chance to diversify.
market. However, some locations and types of
Source: JLL
property may not see falls in sale volumes as
buyer behaviour shifts, particularly in big cities.
Some less well-connected areas may see an
increase in demand as people have sacrificed
It is anticipated that working
commuting convenience over getting extra space. remotely and from home will
It is anticipated that working remotely and from remain a feature of our lives
home will remain a feature of our lives going
forward – albeit not on a five-day-per-week basis going forward.
and, of course, not in some professions. Homes
that offer areas to work, access to private
outdoor space and fast broadband will prove the
Hospitality
In November 2020, UK GDP fell 2.6%, with
most attractive to new buyers and renters.
hospitality (which was effectively closed)
COVID-19 has accelerated the trend that is accounting for just over one third of the decline,
making our homes the centre of our lives once highlighting the importance of the sector.
again. Technology is the great enabler and
Current international travel restrictions will mean
therefore the quality of the technology and,
that people are more likely to avoid the hassle of
in particular, the availability and quality of
international travel during 2021, which is likely to
broadband is fundamental in the continuation of
boost the UK ‘staycation’ market this year.
this trend. Developers are starting to offer in-built
technology to appeal to increasing expectations Pitchup.com reported a 500% increase in summer
for features, such as voice-operated lighting, 2021 bookings in September and Haven reported
heating, security and even vacuum cleaners! strong bookings for May half term, July, August
and October half term. For investors, this provides
Investments in build to rent (BTR) will continue to
new opportunities to tap into the growing open-air
grow following the record levels invested in the
hospitality segments of the market.
UK in 2020. It is likely that the BTR market will
Page 3 | UK Property predictions: 2021 | April 2021Regional markets across the UK benefited from these will be reassessed for viability. Re-purposing
strong staycation demand during 2020 while them for alternative use may prove more
key cities lagged due to lack of international profitable as investors diversify their portfolios.
travel. Key UK cities such as London and There is a danger that this may lead to oversupply
Edinburgh, which rely heavily on international in some cities as the re-purposing will be targeted
travel, will continue to feel the brunt of the directly at the residential market, where existing
pandemic impact on business activity until travel residential schemes are already underway.
restrictions are eased.
Source: JLL
Business hotels are likely to lag behind the Past performance and forecasts are not a reliable indicator of
general recovery because the demand for future results.
meeting facilities and conferencing facilities is This document does not constitute a solicitation,
recommendation or promotion of the above mentioned external
likely to be significantly down on 2019 levels. companies or institutions.
The UK wholesale sector is effectively closed as
national lockdowns continue to be enforced, with
only business travel currently permitted. With Regional markets across the UK
more than 650,000 jobs already lost and some
businesses permanently closed, future ‘pipeline’ benefited from strong staycation
projects remain uncertain. At the end of 2020,
around 125,000 hotel rooms were in the final
demand during 2020 while key
planning stages across the UK. These are rooms cities lagged vdue to lack of
in hotels yet to be constructed, but for which
planning consent has been secured. Many of international travel.
Page 4 | UK Property predictions: 2021 | April 2021Notes
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