Quarterly report letter: UK Real Estate market observations

The world continues to be a fragile and confusing place in which to live our lives, both from a work and social perspective. I suspect the principal question being asked currently by the majority of us would be related to what exactly we are being guided to do by the leaders of our respective Countries, as it seems to me that they are as confused in the giving of the messages as we are in the receiving of them? Knee-jerk policies created by anxious politicians whilst listening to cautious scientists, with both being interpreted for dramatic headlines by the media in pursuit of their 24/7 fix. A perfect storm.

Most of us have been through one form or other of lockdown over the last 6 months, pursuing a strategy of isolation followed by social distancing, sanitisation and masks – we understood this, whether we agreed with it or not. But now we have policies seemingly inspired by the pop group ‘Black Lace’, when in 1989 they sang about the Hokey Cokey! So are we staying in or are we going out? I understand the need for ad hoc reactive decisions, but they should at least unite in a strategy of explicable common sense. Perhaps for the UK politicians there was so much time spent dancing around the in-out Brexit question that this has inhibited the thinking of those at the helm of our National ship as it navigates its way through these turbulent waters! 

In addition to my struggle to make sense of many of the current COVID related policies and guidelines, I am puzzled by the general reaction to this second wave of infections. Surely, we were expecting a second wave and no one in a position of authority is surprised by the increasing numbers? Once we started to come out to work and play together again, infections were obviously going to increase – materially! If there is no herd immunity and no vaccination, then of course that is what is going to happen! So once again we must manage the infection numbers to protect those at greatest risk and to ensure our healthcare systems can cope, and once again we need to also consider the cost of the lockdowns and restrictions in social and economic terms. My opinion in all this counts for little - but my personal view does not accord with current UK policy as I think, now we understand more about COVID-19 and who is most at risk, there is a simpler way to protect the NHS and the vulnerable whilst allowing the economy to recover. Let’s remember that a very sick economy also seriously infects many people and businesses over many years, directly and indirectly.

Coming from all this recent trauma are some interesting debates to be had about the future of certain real estate sectors. Major disruption first came into the three ‘traditional’ sectors some years ago through retail, as a result of on-line shopping. This cyber-led new world order also impacted within the second of the traditional sectors in the form of the elevation and rebadging of distribution/warehousing as logistics. Now the disruption might prove to have come to the third of the traditional sectors, as offices struggle to retain their identity as a result of technology enabled flexible working, which has proved both appealing and surprisingly efficient for many individuals and may also allow for some corporate cost savings. Are we going to be flexibly working, working from home or living at work? Will companies fear a loss of productivity or embrace a world in which occupiers can reduce their space needs or go to a hub and spoke model utilising satellite offices? Will demand for flexible/serviced offices materially increase and how will the balance of the sector fare if occupiers take advantage of that flexibility? Or will the new normal return to something that looks very like the old normal? The jury is definitely out, but I strongly suspect that, whatever happens in the shorter-term, the longer-term disruption of the office market has now begun in earnest.

As we are all aware, also changing the landscape of real estate investment is the interest from many investors in the ‘alternative’ real estate sectors. We know that pre-COVID there was already significant investor appetite for student accommodation, build to rent (multifamily), retirement living, self-storage, life sciences and data centres - and it would appear that the appetite for these sectors is substantially undiminished by recent events (perhaps it has even strengthened), as the fundamentals remain strong, crisis performance has proven robust (to date) and the relative income yields remain competitively high.

In between the winners and losers of the longer-term trends are the short-term victims of COVID, where I suspect focus and interest will return in the near future, especially if distress is witnessed and a bargain can be found. Hospitality and leisure (hotels/hostels/pubs/restaurants/theatres/cinemas/gyms etc) are not a lost cause in my opinion and many will find their way back into favour – or at least those that can survive this brutal period. Albeit I suspect all interested investors will prove more operationally and covenant aware and discerning than they were pre the events of 2020.

My final market observation on this occasion is with regards the UK planning system and particularly the Use Class Order. I recently spent time talking to The Secretary of State for Housing, Communities and Local Government, about the need for a simpler change-of-use process for redundant buildings, about the development of brown field land and about the frustrations of the planning system more generally. Although we did not find agreement on using practitioners common sense as the foundations for a review of the system, he has however gone ahead with his promise of reform in this area intending to make it easier to change uses and redevelop redundant spaces. As with all new arrangements it is early days and there are certainly grey areas around how local planning authorities may seek to restrict the new flexibilities. It is also important to note the transitional arrangements mean that the full benefit of the flexibility offered will not happen until the end of July 2021.

To conclude, I certainly hope that the second half of 2020 brings less disruption than the first half, but unfortunately Brexit is bound to return to the headlines as we head towards the year end and I fear that COVID related restrictions will continue to influence how we live our lives.