I was invited to join a Zoom meeting on Thursday morning, by one of the leading commercial banks we deal with. We have an excellent relationship with this particular bank following a number of years managing properties on which they have loans. I was very pleased to accept their invitation to their ‘inner sanctum’ and thought you may be interested in what I found out.
The meeting was run jointly by the bank’s senior Asset Management and Investment teams in Leeds and London. The topic focused on what the investment world expects to happen over the next two or three years. As their asset management team have £m’s invested across a broad spread of stocks, including property, I was particularly interested to get their view on where they think the property market is heading, what they are keen to lend on and more especially what they think should be avoided.
The data these guys have is very impressive. The 20+ guests were given a run-down on what happened to the economy when Covid-19 struck, how the reaction compared to previous world calamities (even going back to the late 1700’s!) and how the world’s economies have reacted since.
“The data the bank presented clearly showed
a V-shaped recovery is underway.”
We all know the majority of governments around the world have acted in unison, collectively agreeing to support their economies until the pandemic is over/under control. Quantitative easing, furlough schemes, grants and loans, interest payment deferments, rent holidays, etc. have resulted in an almost unprecedented recovery in business and public confidence. The data the bank presented clearly showed a V-shaped recovery is underway.
The overall impression I had, was that until unemployment comes down (especially in the US) and tax revenues start to recover, governments will continue with their current strategy. I interpret that to mean interest rates will remain low for at least the next year or two. Only when unemployment is back to pre-pandemic levels will any inflation start to be reined-in by the use of higher interest rates. Given that low interest rates are driving the property market at the moment, it would appear we are set to see buyer demand continue at or above current levels throughout 2022, and perhaps even 2023.
There are concerns regarding commercial property, especially retail and office space. We’ve all adapted to shopping online, especially for items that we don’t need to touch or feel before we buy them; I can’t cope with buying clothes online – I need to touch the material, especially a suit, to even contemplate trying it on. So, ordering a suit online, only to open it, touch it and then repackage it for return is a waste of time for me. But Mrs Moore is now doing our weekly grocery shop online. We have our wine delivered to our door. We purchase white goods online without hesitation, and I’ve even taken to ordering plants for the garden online – I must say the deals I’ve taken advantage of have been great (much better than the local garden centres) and the plants have been delivered in first class condition! I just hope my planting and nurturing skills are up to the job?
Online sales will no doubt ease-back now shops are open. We were told that around 20% of our shopping was online pre-pandemic. That shot up to 35% in 2020. With many retail shops having closed over the past 18 months some of our shopping will have to remain online (Thornton’s Chocolates?) therefore I suspect we won’t see the level drop back to 20%. What will happen to the empty units on our High Streets and city centres? We will have to wait and see whether these are taken by new retails (possibly at lower rents?) or will we see residential property emerging, mirroring our European neighbours?
Warehousing has seen a surge in demand as a consequence of online retailing. Whether these are production centres, logistic hubs or simply storage for stock, the price per sq.m. has rocketed recently. These would seem to be fairly attractive investments for those with sufficient capital to fund a purchase.
“…if cities rapidly complete improvements to their greener transportation systems, may we see a decline in suburban office space…?”
With a large percentage of employees working from home, quite successfully, there’s going to be sea-change in the demand for office accommodation. It will still be needed, but I suspect it will be utilised differently. Although Zoom and Teams have played their part during the pandemic, and will continue to facilitate communication between many workers and customers going forward, there is nothing better than a face-to-face meeting where ideas need to be shared. I expect office suites will be redesigned with more meeting rooms rather than portioned offices for individuals. Customers are already telling me that they are eager to go back to the office for meetings, but they are happy to work from home at least 2 or 3 days a week. I wonder if we shall see a decline in demand for large central city office space? On the other hand, if cities rapidly complete improvements to their greener transportation systems, may we see a decline in suburban office space (where employees have to drive and park) in favour of employees being happy to use public transport into the city centre for the few times a week they actually need to ‘go into the office’. That would be a good excuse for a glass of wine or two after work with colleagues, knowing you don’t have to drive home!
The residential market, for both sales and rentals, in the suburbs should thrive over the next couple of years. As unemployment comes down and affordability increases, as people adjust to working partly from home and partly in the office, I expect demand for housing to rise. There is going to be little funding for social housing (given the debt the country is/will be in post-pandemic) therefore I cannot see the housing stock growing at the same pace as the rising demand. Property prices and rental values will inevitably increase.
With uncertainty over how commercial property will be utilised and what demand will look like over the next couple of years, where will investors turn? From what I understood from today’s meeting the general sentiment seemed to be that the stock market is over-valued. It will take a keen-eyed broker to spot growth opportunities therefore investors self-managing their little portfolios with relatively small amounts of spare cash to invest, may be reluctant to invest further in the stock market, fearful of a collapse in capital values. Will this see a sudden surge in demand for residential buy-to-lets?
I think we’re in for a very interesting couple of years.
– A Newsletter Editorial by Director Michael Moore FNAEA, MARLA.