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2022 - A Brave New World

Wednesday, 19 January 2022

James Routledge, Head of Investment at PAI members Matthews & Goodman LLP, delivers his property predictions for 2022.

The backdrop  

Despite the ongoing challenges of the pandemic, 2021 saw an acceleration of the Green Industrial Revolution globally and, a boom time for participants in the industrial & logistics, residential Build to Rent (BTR) and the Alternative (property) sectors – which benefit from demographic change.

The over-riding focus on quality and sustainable income has driven underlying investment yields down.

The omens that 2022 could prove a turbulent year include:

- Structural changes influenced by demographics and technology (which are driving extremes of fortunes within asset classes)
- Upcoming regulation driven by the ESG agenda
- Geopolitical issues.

Forecasts for the UK’s GDP suggest that it will out-pace other G7 economies. This is likely to be underpinned by UK business investment rebounding in 2022 as overseas investors target the UK (especially London) as a preferred investment destination - which is thought will be second only to the US.

This will create a positive environment for business growth and capital flows into and around the UK.

The big questions for 2022

Over-riding considerations include:

- The cocktail of high inflation (5.1% pa (CPI) and 7.1% (RPI) to December 2021
- Ongoing supply issues
- Rising energy prices
- Emergence of new Covid variants
- A gradual rise in the Bank of England base rate
- Rising bond yields
- The possibility of war between Russia and Ukraine
- Stability of China’s international relationships.

Whilst off most people’s radar, the UK’s trade deal with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) appears to be on track for 2022. Becoming part of this Asia-Pacific trade alliance - which includes Japan, Brunei, Malaysia, Singapore and Vietnam in Asia; Australia, New Zealand, Canada, Mexico Chile and Peru in the Americas - could prove a vital post Brexit trade catalyst.

Economists are split over the prospects and timing of when inflation will peak (at perhaps 6% in spring 2022) before falling back to the 2% target. Some argue inflation will remain elevated beyond 2022.

This contrasts with current pricing of bond yields (UK 10-year gilts are yielding 0.76%) which has barely moved in response to rising inflation and, given the fact that the market is pricing a rise in UK base lending rates to 1% by the end of 2022 (currently 0.25%), the investment fraternity is anticipating ongoing low investment yields.

However when considering longer term investment planning, a big unknown is when and to what extent the UK and other governments will reverse quantitative easing by selling bonds - leading to rising bond yields and interest rates.  With this in mind, a doubling of both bond yields and interest rates beyond current 2022 forecasts, will probably be factored into five-to-ten-year assumptions.

The outlook for property in 2022

- An increase in all-property capital values for commercial property of 2.9% (total return 7.4%), based on the November 2021 IPF consensus, compares to circa 4.4% increase (total return 11.0%) in 2021.
- The 2022 forecasts anticipate industrial (at 5.9%) and retail warehousing (3.2%) as showing highest capital growth - down significantly on 2021 (circa 20% and 9% respectively), with offices standing still.
- Secondary office values are likely to fall in 2022
- Further modest falls anticipated for high street retail and shopping centers.
- Investment transaction activity will increase. Buyers will be a broad mix of domestic and international investors, chasing a thin supply of well specified and secure income assets with growth potential.
- ESG considerations will be important within the commercial property sector, with institutional investors focused on purchasing assets with EPC ratings of A or B. New build, refurbishments & refits will be more carbon sensitive.
- Increasing levels of obsolescence, resulting in distressed and unlettable/stranded assets will provide opportunities for active managers with repositioning agendas.
- WFH will be embedded as a business/employee strategy, with an ongoing impact on office and home workspace designs, as well as the provision of community and convenience facilities.
- Behavioral change will continue to reshape business models, as well as occupational and location strategies - accelerated by the pandemic and Government inspired north sourcing (which will impact all target cities).

Comparative asset class performance

Commercial property will remain an attractive asset class. With an average income return of around 5% a key component of total returns, it provides an enduring value against equities and gilts:

- The FTSE All-Share index currently provides an average dividend of 3.6%,

   - With a 2021 rise in value of 98%
   - And a decline of 12.5% in 2020.

- 10-year UK Government gilts have been trading at yields of between 1.2% and 0.2% over 2021, finishing at 0.97%. A rise in yields and fall in value can be anticipated over the next one/two years, as outlined above.

As with all asset classes, prospects within sectors and geographies will vary. Some suggest that the UK domestic stocks are considered undervalued in an international context, as commercial property yields are on average higher than comparative continental European markets. This reinforces the case for international investors targeting the UK in 2022.

Sustainability is key

With the growing influence of ESG on both national and international corporate agendas, over-riding themes will be ‘greening’, regeneration and re-positioning.

Developing low and no-carbon pathways will vary, depending on occupiers’ and/or owners’ strategies, however the issue will impact most property-related considerations.

Broader climate and locational considerations (such as flooding) will impact the flexibility in building design, whilst local planning authorities will introduce more environmental-related conditions in planning consents.    

Green leases and green Memorandums of Understanding (MOU) for existing leases, will become more evident in 2022 as landlords and tenants work together to improve the sustainability of their buildings.

There will be more investment in buildings’ environmental performance management, together with greater investment in pandemic related strategies e.g. touchless technology, heating/cooling systems and physical distancing strategies.

The sustainability agenda will also accelerate the creation of green property loan products, offering preferential terms to borrowers who intend to improve the environmental performance of buildings. We are already seeing differential pricing of loans in the residential sectors, dependent on the EPC of a property. In 2022, new Global Standards for RICS Valuation will require a more explicit consideration of matters relating to sustainability, including future levels of capital expenditure to upgrade assets, which lenders will take note of.  

London to remain a magnet for inward investment

London will attract an increased amount of overseas investment, especially from the Middle and Far East - because of the country’s political stability, legislative infrastructure and higher property yields compared to most of our European competitors.  

Whilst domestic UK investors have mostly switched their buying focus to the regions as a tactical stable income play, overseas investors will seek core London assets for longer term capital preservation purposes. 

Future of the office

Whilst the future of office has been much debated, what is certain is that there will not be one generic solution.

Flexibility and an underlying move to hybrid working are now key factors for smaller businesses but equally, workspace planning will reflect the need to facilitate the creation of communities of people with similar interests, skills and expertise, whilst meeting their unique needs and values.

These workplaces will be more people centric - collaborative, authentic, sustainable, experiential and above all, customised.

Offices – Where is the Growth?

A number of forecasts suggest that 10% less office space will be required - with London most exposed. Hybrid working arrangements will result in office occupancy rates remaining below pre-Covid levels however, density levels will also reduce as new ways of working continue to be introduced.

This highlights a polarised market, with a flight to quality in terms of location, environmental credentials and occupational concepts especially in city centre locations, where there will be strong competition to retain and attract new talent.

Vacancy rates in London stand at between 7% - 10% (depending on the sub-market) reflecting an annual take up 15% below the long-term average. Although take-up is muted, occupier demand is firmly focused on well located Grade A buildings, which are still in short supply - with rental levels being maintained.

Regional Drivers

The prospects, within some regional markets, is more upbeat - such as in Manchester where new schemes in the city centre are attracting tech-based occupiers and, there is talk of upward pressure on rentals - albeit still a flight to quality.

The same is true in some lower rented regional markets such as Liverpool – where there is a shortage of Grade A supply due to conversions to alternative uses.

Some stronger regional centres such as Manchester are experiencing inward investment from overseas and the Oxford-Cambridge Arc continues to  build on the growing success of the life science sector.

The north shoring of government departments, such as the intention to move the Treasury campus to Darlington, will have a big impact, however the scrapping of HS3 does pose questions of the Government’s continued commitment for its ‘Levelling Up’ strategy.

Retail – structural change brings winning locations & players

The end of the high street continues to be exaggerated as ‘brick’ (store) networks will play a critical role in enabling online offerings – e.g. Amazon Fresh has already opened its first store in London and analysts believe that there will soon be a network of 30 outlets in the first phase of its expansion in the UK

The pandemic has created a dynamic which none of us could have predicted. However, the seismic change in the way people shop (and the increasing penetration of online shopping), was simply accelerated by COVID. Following the wreckage in the high street and demise of department stores, repurposing is starting to become viable.

Convenience stores and Value retailers continue to be dominant takers of space on retail parks, which will continue to attract strong investment interest due to resilience given suitability for click and collect orders, customer returns, home deliveries (in effect last-mile fulfillment centres) and alternative use possibilities in urban areas.

The switch to electric vehicles will continue to accelerate and help consolidate retail warehousing and fuel stations which incorporate fast food/convenience units and fast charging points. 

Drive-thru restaurants and associated clusters will continue to be a beneficiary after the pandemic.

Urban Industrial - a 2022 top pick

This asset class will remain top of investors’ buy list, together with residential properties.

An inflection point for yields could be round the corner, especially with prime industrials yielding between 3% and 4%, set against an environment of rising bond and interest rates. However, constrained supply and competing uses such as residential, will ensure strong pockets of rental growth given a wider backdrop of substantial rental growth experience throughout the industrial and logistics sector.

Self-storage, which is attracting significant inward investment, will seek more innovate solutions to expand facilities - including office buildings and retail parks where price points are lower than prime industrial locations.

The intention to introduce Clean Air Zones in eight cities in England and Scotland will probably eventually follow London’s Ultra-Low Emissions Zone (ULEZ) model. This will impact retail distribution strategies, as well as businesses which do not need to be in city centres and can benefit from relocating their business to outside the zones.

Beyond 2022


The property market has a strong propensity to rotate and evolve as external factors drive the shifting fortunes of every asset class.

The medium-term trend is likely to be for shorter property cycles, driven by environmental related regulations, technology advances, the need for flexible buildings and societal requirements.  

For more information, please contact James Routledge


This report contains information, which may be helpful in anticipating trends in the property sector, however, no warranty is given as to the accuracy of and no liability for negligence is accepted in relation to the forecasts, figures or conclusions contained in this report. They must not be relied on for investment or any other purposes. © 2022 Matthews & Goodman.

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