A night view of the London city skyline. Brexit might pile pressure on the construction market.

Commercial property market outlook

Commercial property markets should make a comeback in 2021 and 2022, with strong investor demand for asset classes seen as Covid-resilient, according to Mat Oakley, Director of European Commercial Research for Savills UK.

Renewed confidence

Mat says he is confident about the future despite the impact of the pandemic on the UK’s services-led economy in 2020 resulting in the country’s GDP being hit harder than most of its global peers.

We went down harder but we’ll come back stronger, and I see a strong growth period ahead.

The wider UK economy and commercial property markets will benefit, Mat predicts, from improving consumer confidence as the roll-out of Covid-19 vaccines continues and the withdrawal of pandemic restrictions encourages people to feel more positive.

With pent-up consumer demand combined with accumulated savings over the past 12 months equivalent to nearly 14% of the UK's annual output, he believes the country is “on the cusp of quite a significant recovery” driven by a surge in consumer spending.

Investment appetite

With real estate generally viewed by investors as sitting somewhere between equities and gilts on the risk/return spectrum, Mat says it is delivering better returns at the moment than many other asset classes and with relatively low risk.

Commercial property markets were already affected by international investors’ concerns around Brexit in 2020, but investment recovered before the end of the year and Mat expects that bounce-back to continue in 2021. In fact, he reports that investment activity in commercial property is already almost back to normal pre-Covid levels and predicts further growth thanks to “a strong finish” to 2021.

Mat sees a continuation of investment patterns that predate the pandemic. That means less money going into retail and leisure, with the beneficiaries being logistics, industrial and other assets. Logistics will remain the world's number one real estate asset class because it is both safe and Covid-resilient, but he adds that, increasingly, markets that used to be seen an alternative, such as student housing, seniors’ and multi-family housing, research/science property and data centres, will experience significant price inflation.

Key trends

The pandemic has generally impacted commercial property markets in a similar way to previous recessions, with an oversupply of second-hand space in the retail and office sectors. Some of that, Mat believes, will be repurposed or redeveloped against a background of rising construction costs. The resulting lower levels of development activity may see a period of lender aversion that will mean developers will likely need to deliver more pre-lets to secure funding.

While office space will remain a key driver of the commercial property market, there are clearly questions about future reduced office usage as a result of the Covid-enforced switch to remote working that has proved so popular with many employees.

Mat suspects the majority of office workers might favour continuing to work from home one or two days a week, which could see a 10%+ reduction in demand for floor space. However, that change is unlikely to manifest itself immediately, but as and when companies review office leases. In addition, many companies’ plans to reduce office space predate Covid-19.

Neighbourly retail

High streets have, of course, been in decline for a long time because of the switch to online shopping, but Mat points to the so-called ‘doughnutting’ side-effect of the pandemic, with city and town centres suffering, while retail in the suburbs is very active.

With people spending more time during Covid close to home rather than where they normally work, much more of their weekly spend is happening at a neighbourhood level. Mat says neighbourly retail investment is attracting a lot of interest across the sector.

Brexit concerns

The outlook for commercial property is generally favourable, but Mat cautions that there could be challenges ahead as a result of the UK’s new trading relationship with the EU.

New systems and bureaucracy for bringing EU construction workers and goods into the UK are just beginning to bite or have yet to be finalised. These factors could potentially mean strong upward pressure on construction prices, which could negatively impact commercial property development in the UK.

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