Yield is the key to real estate’s enduring appeal to investors, even as other asset classes are seeing their appeal decline due to negligible returns. While prime real estate continues to generate a 4%-plus annual return, and with other assets generating yields above 7%, the attraction is clear, when compared with rock bottom interest rates for money in the bank and the prospect of negative bond yields as well.
However, it is also clear that different real estate asset classes’ fortunes are diverging strongly, with industrial, warehouse and data centre property in great demand, followed by build-to-rent and student accommodation as the current highlights of the sector.
Housebuilding has performed better than expected, as demand pent-up during the lockdown was released with the benefit of cuts in Stamp Duty as well.
Retail property’s painful demise has accelerated, and there are now question marks over the long-term health of the office sector, with the jury out over whether mass working from home will continue indefinitely or whether it is a short-term blip caused by coronavirus.
Our 'Future Living’ research last year showed that global institutional investors are gravitating rapidly towards what were known as alternative assets – nicknamed `anything with a bed’ – and are now becoming mainstream.
Digging more deeply, CBRE’s latest Global Real Estate Capital Flows confirms these trends, with industrial yields remaining level in Q2 2020 and global retail and office yields edging higher.
CBRE also uncovers a worrying sharp slowdown in transaction levels, with global real estate investment totalling $109 billion in the second quarter – a 57% reduction from Q2 2019 and the lowest quarterly total since 2012.
But for the future of property investment perhaps CBRE is measuring the wrong markets.
Our `Future Living’ research last year showed that global institutional investors are gravitating rapidly towards what were known as alternative assets – nicknamed `anything with a bed’ – and are now becoming mainstream.
While new ways of shopping have dismantled the case for buying retail property, and working from home may or may not spell the end of the office, it is hard to argue how people will ever not need a place to live.
Savills reports that investment demand for multi-family or build to rent homes has remained solid throughout 2020, and there is likely to also be increased demand for retirement villages or later living, with the pandemic causing people to be wary of living alone or in care homes.
Student accommodation, too, while on the face of it appearing challenged, could benefit from COVID-19 as people choose to enter further education rather than trying their luck in the depleted jobs market.
Retail property’s painful demise has accelerated, and there are now question marks over the long-term health of the office sector, with the jury out over if mass working from home will continue indefinitely
People talk about unprecedented change caused by coronavirus – in property terms, will Covid-19 see an acceleration away from traditional commercial assets to the `living’ sector? And after decades of urbanisation, will the pandemic result in a major reversal of this trend, which would have profound consequences for every use class.
The Covid-19 pandemic has seen much of the optimism that accompanied the Conservative general election victory in December dissipate. What has been really encouraging has been seeing the resilience of the UK real estate sector as a whole. As we settle in for an extended lower for longer climate, the knock-on effect for disciplined, experienced lenders like ourselves, backing capital seeking exposure to structurally supported real estate, is that the market has remained very much open for business.
