Spec Finish

Industry trends www.thefis.org 21 Hours worked will slowly increase, despite job losses. Two million people were still on furlough when the Government last extended the scheme. Total hours worked should increase throughout 2021, as furloughed staff return to work, keeping the economic recovery on track. However, mass job losses are inevitable and unemployment should peak at close to 2.7 million people by the end the year. The Treasury will try to inspire more private spending. Fiscal policies introduced since March 2020 have cushioned the drop in private demand. New schemes, in the same mould as ‘Eat Out to Help Out’, will struggle to stimulate a meaningful and sustained increase in private spending while consumer sentiment is weak. Nonetheless, we expect another year of heavy fiscal stimulus. Tax hikes and other measures to consolidate the government debt pile – already over £2tn – is likely to come in later years. Central banks plug the gap in demand with more cash. The Bank of England can still buy another £170bn of gilts before hitting its new £895bn limit. It has recently slowed the pace of its buying to keep some powder dry but will undoubtedly expand its asset purchasing programme again if needed. Interest rates will stay low and negative interest rates on short-term debt are likely. UK 10-year gilt yields will be close to zero next year, perhaps rising above 0.5% if the economic recovery stays on track. Inflation will be volatile, but deflationary pressures will be strongest. Inflation will stay below the 2% target throughout 2021. Volatility will come as energy prices fluctuate and fiscal policies change – for example, the end of the ‘Eat Out to Help Out’ scheme boosted inflation by over 20 basis points in September. But given weak demand from businesses and households, disinflation and short periods of deflation are more likely than high inflation next year. Factors that will influence investors Income quality will be a stronger driver of pricing than asset quality. In the 2007-09 downturn, the most resilient properties were those with the longest leases. Whether an asset was ‘prime’, or its location ‘core’, was temporarily irrelevant – if the asset’s lease was so short that re-letting in the ongoing recession was inevitable, its value fell. Long- term property investors should focus on location and asset quality, as those factors drive performance over a cycle. But, right or wrong, risk aversion to income risk tends to trump other factors in downturns and will dictate pricing trends in 2021. Will people want to be in this building in future? The accelerated pace of shopping online and working from home has proved that milestones once slated for the distant future, can pass in a matter of weeks. The pandemic and the ongoing recession have occupiers of all property types reconsidering where they want to be and howmuch space they need. Real estate investors must review each asset and honestly answer; will people want to be in this building in future? Buyers’ attitudes to obsolescence will have a greater effect on asset pricing in 2021 than in previous cycles. The biggest risks in 2021 A lack of real estate debt could limit buyers’ options. According to the CASS UK Commercial Real Estate Lending Report, lenders need to refinance loans worth over £43bn in 2020/21. To put that into context, new loan origination in 2019 was £44bn. There is a wider range of bank and non-bank lenders today than in 2007-2009, but those lenders will struggle to keep their pace of lending. A financing gap is likely, given the weaker economy and large drawdowns on existing facilities. These factors curb the appeal of new lending, especially for riskier activity like development. Ultimately, a decrease in debt will limit investment activity in 2021. Insolvencies will rise, but by how much? Reported company and individual insolvencies have been far below normal since lockdown. New government measures, reduced HMRC activity and reduced operational running of the courts combined to keep insolvencies artificially low. Government support will reduce and measures, such as the Corporate Insolvency and Governance Act 2020 (CIGA), will wind down. Only then will the fallout from the pandemic be clear. With millions of people on furlough and many tenants failing to pay rent on time, default rates in 2021 could be higher than in the global financial crisis. Outlook Logistics are the top performing sector... again. We forecast 28 sector and geography combinations and seven of our top ten markets are in the logistics sector, with prime logistics in Greater London topping the list with returns over 20% expected in 2021. Prime retail returns bottom out in 2021. Prime retail recorded heavy losses in 2019 and 2020, with most markets down around 20% each year. In 2021, losses should stabilise. Some markets will see low, positive returns in 2022. Long-run returns will trend around 7% a year thanks to high income returns and growth from rebased rents. The office recovery won’t hit full speed until 2022. While logistics returns will still be strong in 2022, most office markets will have finally started their growth phase. Prime offices in Bristol should be the top performer in 2022, thanks to the extremely low availability of prime space. Data and pharma sectors pique long-term investors’ interest. Beyond the forecasted markets and looking longer term, data centres and life sciences will emerge as the top picks within the specialist sectors. Both benefit from heavy institutional and private equity investment, and strong technological and demographic trends, respectively. www.cushmanwakefield.com Theeconomyshouldgrowby6.7%in2021