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With Brexit rapidly receding into the background as a pre-occupation, new issues will emerge for UK economics, politics, society and real estate. The shorter-term issues arising from the pandemic will continue to weigh on real estate throughout 2021, though each sector will be affected differently. For most types of real estate, reductions in rents and prices will mostly reflect short-term income loss as the economy has stalled, with an added measure of long-term uncertainty. But others have been relatively insulated or even seen growth. COVID-19 has arguably simply put a rocket booster under real estate trends (such as online retail, or working from home) which were already well advanced in the UK beforehand.
CBRE UK MARKET OUTLOOK – MID YEAR UPDATE
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"The UK’s two national lockdowns mean that the UK economy will now not recover to pre-pandemic size until at least mid-2022. We expect a consumer-driven recovery, with retail sales already having recovered quite strongly. A combination of low interest rates, low inflation, powerful fiscal stimulus and the resolution of Brexit uncertainty will support recovery. While real estate faces a very subdued 2021, we anticipate a good medium-term recovery."
"Office take-up will remain below trend in 2021, but some sectors such as life sciences will outperform. Equity targeting the key central London office market remains high and will drive a reasonable recovery as uncertainties resolve. Flexibility in employee working locations will be a big theme for 2021, but the long term trend of office densification and space efficiency seems likely to remain a big driver of office demand."
"COVID-19 has savaged an already-weak UK high street suffering from high costs, lack of innovation, and pressure from Europe’s largest online retail market. Although some retail formats have proved resilient (supermarkets, retail parks and warehouses), the sector will now be forced to think very radically indeed about its future. Repositioning of many assets to mixed use seems likely."
"The already-surging UK logistics sector will be given a ‘second wind’ by the pandemic’s permanent effect on online retail. With strong demand and weaker supply, rents will rise further, especially for well-located property in peri-urban areas. Yields are expected to fall even further as less specialised investors find ways to access the market, including through M&A and joint ventures."
"Residential property has been the surprise outperformer during the pandemic, with fears of a repeat of 2008’s housing market collapse proving unwarranted. Investment levels into institutional rented property have been sustained and will hit new records throughout the next few years. Fiscal support for the owner-occupied market has maintained prices and transaction levels, though the risk of rising unemployment means we remain cautious about the outlook."
"As with retail, the UK hotel and hospitality sectors have had a very rough ride in 2020. Necessity has been the mother of invention, with operators and landlords forced into much closer collaboration in order to survive. Innovation will proceed at pace to adapt to the weaker economic outlook, ferocious competition, and to maximise efficient use of real estate."
"Scottish people go to the polls in May 2021 to decide the make-up of the Scottish Parliament. Recent polls indicate that a majority of Scottish people now favour Scottish independence, so it’s likely that the debate will hot up in 2021. This could cause new powers to be devolved to Scotland to see off the threat – or, it could herald a new period of heightened uncertainty."
"The Government is conducting a big review of business rates in England, and has made proposals for a substantial reform of UK Capital Gains Tax (CGT). Separate CBRE research indicates that we don’t expect fundamental changes in the structure of business rates, but we predict further (and quite expensive) Government support for high street retailers. Increases in CGT look likely."
"With Joe Biden elected as US President … we can expect a big reset on climate change in particular. The UK is hosting the COP26 climate change talks in 2021 and so quickly getting close to the US on this subject will be essential if the talks are to be seen as a success."
"With Brexit rapidly receding into the background as a pre-occupation, new issues will emerge for UK economics, politics, society and real estate. The shorter-term issues arising from the pandemic will continue to weigh on real estate throughout 2021, though each sector will be affected differently.
For most types of real estate, reductions in rents and prices will mostly reflect short-term income loss as the economy has stalled, with an added measure of long-term uncertainty. But others have been relatively insulated or even seen growth.
COVID-19 has arguably simply put a rocket booster under real estate trends (such as online retail, or working from home) which were already well advanced in the UK beforehand."
UK economy expected to grow rapidly for the remainder of 2021 as conditions normalise (see Economy section), supported by world-leading vaccination rates.
Brexit issues likely to become increasingly normalised, with a recovery in trade patterns as tactical avoidance of the deadline by traders unwinds; the NI Protocol will remain sensitive with no obvious long-term solution.
UK financial services access to EU markets is also likely to be an ongoing negotiation for the remainder of the year.
The main risk for UK property markets in 2021 relates to slower international growth acting as a drag on UK; and concern about a vaccine-resistant virus variant which prompts winter 2021 constraints on economic activity.
All UK real estate investment will recover to around £53bn by end 2021 (2020: £42bn), matching the level achieved in 2019, though still some way off the record UK high achieved in 2015 (£70bn).
For more detail on the implications of Brexit for the UK property market, see CBRE’s Brexit research home page.
Firms in the UK still have no clarity as to when ‘work from home’ guidance will end, and when the relaxation of social distancing regulations enabling full occupancy will occur. We do not expect to see a return to normal levels of leasing activity until this occurs.
Office take-up for the full year 2021 in the UK will surpass the record lows seen in 2020, but will remain significantly below trend.
We forecast a decline of 5.3% in UK office rental values for 2021; and a decline in UK office capital values of 2.2% over the same period.
We maintain our existing view on a transition towards a more hybrid form of office work. This will entail fewer days being spent in the office for the average employee. Our models suggest a fall in underlying demand for office space of c.9%, phased over the course of three years.
For more detail, see CBRE’s Q1 2021 UK Offices Market Snapshot.
We expect an even busier second half of the year both in the leasing and investment logistics markets.
The expected continued growth in the online channel described in our latest Global E-commerce Outlook, will require an additional 59m sq ft of e-commerce dedicated logistics space in the UK over the 2021-2025 period.
Following a further compression in prime yields during Q1 2021, investors and landlords will now be focusing on opportunities for rental growth given low vacancy rates and a relatively healthy development pipeline.
May’s RICS residential survey showed a moderation of near-term sales expectations. This suggests that growth in sales volumes may soften in the coming months once the stamp duty holiday begins to taper away.
An acute supply and demand imbalance, with buyer enquiries significantly outweighing new instructions, will underpin price growth to the end of the year, but less strongly than in 2020. We forecast UK house prices will rise by 5.9% in 2021.
The strong performance of residential property during the pandemic is attracting new capital to the sector. We expect investment to remain strong in the medium term. We expect Build-to-Rent investment to reach a record high of £4.2bn in 2021.
For more detail, see our residential property report What To Watch in 2021 and our Q1 investment report.
The Scottish property market is very unlikely to be affected in any meaningful way by this uncertainty in 2021. Evidence from 2014 suggests a referendum would only disrupt the property market in the 3-6 month period before any referendum is held; and could quickly recover afterwards.
For more detail, read our blog on this topic.
Business rates review is unlikely to result in major structural change, but may see simplification of reliefs, extension of scope, and some adjustments intended to improve perceived fairness. An online sales tax may also form part of the package.
CGT on property investment gains may resurface in the autumn, when Chancellor may feel he can move on from a short-term narrative around tackling pandemic-related issues to longer term fiscal issues.
For more detail, read our blog on this topic.
The UK is hosting the COP26 climate change talks in November and we therefore expect that the UK Government will aim to show that it is playing a leading role. This is likely to result in additional targets and commitments affecting real estate and green finance.
There will be further development of a UK Green Taxonomy aimed at defining environmentally sustainable economic activities to attract and shape green investment. If it follows the EU model on which it will be based, this is likely to classify certain real estate (and real estate transactions) as not contributing adequately to environmental sustainability.
During 2021, progress on clarifying and consolidating global reporting and disclosure standards is likely.
Demand for ‘green offices’ will accelerate the existing divergence in values between prime and secondary office property.
For more detail, read our blog on this topic.
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23.1%
The UK’s transition out of the
European Union occurred on
31 DECEMBER 2020
Total UK goods trade with the EU was 23.1% lower in Q1 2021, compared with Q1 2018. But trade with countries outside the EU was just 0.8% lower over the same period.
0.8%
There has been continuing dispute and controversy over the Northern Ireland Protocol aspects of Brexit.
In the 12 months from 1 March 2020 to 28 February 2021, UK commercial property values fell by 7% on average; they have been broadly flat on average since.
7%
32m
people
60%
32m UK citizens (60% of the adult population) fully vaccinated – one of the highest levels in the world.
Most COVID-19 related restrictions now lifted in the UK, but spread of Delta variant delayed the final easing until 19 July 2021, and international travel remains extremely limited.
CBRE estimates that the pandemic has brought forward UK e-commerce growth by 5 years, and office WFH habits by 7-8 years.
The existing legal ban on evicting commercial property tenants was extended to March 2022.
A third national lockdown in England and Wales caused more short-term disruption, with UK GDP falling -1.5% in Q1 2021 – though this was far smaller than the -20% fall seen in April 2020.
-1.5%
Following the lifting of restrictions, GDP is recovering strongly. In April, UK GDP grew 2.3% on March, the fastest monthly growth since July 2020.
2.3%
The Purchasing Managers Index (PMI) is signalling strong GDP growth in May and measures of mobility only 10% below normal levels in June.
10%
Take-up in Central London totalled 2.3m sq ft for the year to May 2021, a year-on-year fall of 25% and 55% down on the 10-year average.
31%
LONDON
2.3M SQ
Take-up for the UK cities plus the South East markets totalled 1.5m sq ft for the first quarter, 31% below the 5-year average.
Despite low levels of take-up, a ‘flight to quality’ emerged. Outside Central London, the only two deals over 75,000 sq ft to transact were both for development space (in Reading and Leeds).
There was a marked increase in demand for flexible space from occupiers, and we have seen large deals in the UK markets; notable examples are Goldman Sachs and HSBC both in Birmingham.
As expected, life sciences occupiers have been prominent in taking space. Major deals include Synlab taking 103,000 sq ft in London and Binding Site taking 98,000 sq ft in Birmingham.
At £2.2bn, All UK office investment was down -65% and -37% in the first quarter of 2021 relative to the previous quarter and Q1 2020 respectively, primarily due to temporary restrictions on overseas investor visits.
Following the re-opening of non-essential retail, UK retail sales increased sharply by 9% in April 2021 compared with March 2021.
9%
The early 2021 UK lockdown was less damaging than previous lockdowns. There was a 26% average decline in year-on-year retail sales during the Jan/Feb 2021 lockdown compared with 48% decline during the first Apr/May 2020 lockdown.
44%
The pandemic has accelerated the growth of UK e-commerce, with online sales increasing by 44% in 2020 and total online penetration reaching 26%, up from 17% in 2019.
Footfall in the UK is recovering, but as at June 2021 it was still 22% lower than pre-pandemic levels.
Total UK retail investment volumes reached £1.05bn in Q1, an increase of 4% on Q1 2020 (but is still below the long term average).
4%
While high street and shopping centre yields continue to rise, retail warehouse yields remained broadly stable or lower.
122%
50%
Industrial & Logistics leasing activity remained robust during early 2021. Online retailers accounted for almost half of total Q1 take-up. The UK recorded the highest ever space under offer (16m sq ft) at the end of the quarter. The UK vacancy rate compressed even further to below 4%, with XXL units particularly scarce.
Industrial & Logistics investment volumes soared by 122% in Q1 2021 compared with Q1 2020.
As we predicted, there has already been significant M&A activity, including Oxford Properties Group buying M7 Real Estate, and St Modwen accepting Blackstone’s takeover.
Residential market activity subsided at the start of 2021, with a 14% fall in mortgage approvals between January and March. Even so approvals remained well above its long-term trend.
14%
The existing stamp duty holiday (for homes up to £500,000) was extended to 30 June 2021, with the threshold reducing to £250,000 between 1 July and 30 September 2021.
This revived activity, and the Bank of England recorded a 5% rise in mortgage approvals between March and May 2021. UK house price inflation reached 10.9% year-on-year in May 2021, the highest growth rate in almost seven years.
5%
There was £771m of residential investment in Q1 2021, with a further £1.5bn of deals under offer.
18.8%
In the year to April 2021, UK Regional Hotels achieved an average occupancy level of just 18.8%. On a 12-month moving average basis, April was the first month in which occupancy increased (by 1.0 ppt) since November 2019. (Source: HotStats)
VS
7.9%
London hotels achieved an occupancy of just 7.9% in the first four months of 2021.
Business-oriented city hotels have underperformed relative to resort/countryside hotels which have been supported by strong ‘staycation’ demand, along with serviced apartments, holiday parks, camp sites and private rentals.
The pandemic has partly commoditised the hotel offer across almost the whole market. So there has been little difference in the occupancy and rates achieved by limited-service midscale hotels and full-service upscale hotels.
VS
UK Economy and Midscale hotels achieved a Revenue per Available Room (RevPAR) of £12.5 between January and April 2021, versus £10.8 for UK Upscale and Upper Midscale hotels – just 23% and 17% respectively of the levels achieved in 2019.
SNP failed to secure absolute majority in May elections but independence-supporting parties still have control of Scottish Parliament.
Opinion polls now suggesting support for independence has fallen back and is again ‘too close to call’.
HM Treasury fundamental review of business rates review was again delayed, now due autumn 2021.
AUTUMN
2021
Chancellor announced freeze in business rates multiplier for 2021-22 and further business rates relief for hardest hit areas of the economy.
Announcements on CGT reform expected at Budget 2021 did not materialise.
78%
UK announced new climate change targets in April 2021, committing the UK to a 78% reduction in greenhouse gases by 2035.
The US re-joined the Paris Agreement and key global political leaders reaffirmed their commitment to new climate change targets and actions.
CBRE expects strong GDP growth in Q2, and above average growth rates for the rest of the year. UK GDP is now expected to be back to pre-pandemic levels by the end of 2021.
There is greater uncertainty about future inflation. We still think inflation will rise to 2% in H2 2022, driven partly by sharp commodity price increases, which will affect construction costs. But the likelihood of a general and sustained rise in inflation remains low.
The overall economic impact of a 4-week delay in lifting remaining lockdown restrictions should be modest, as UK consumers have found other outlets for their spending in recent months.
For more detail, see CBRE’s most recent UK Economic Outlook (April 2021).
We expect online retail in 2021 to stay flat at 26% which is the same rate as at the end of 2020 and then increase further in the following years. The much higher levels of e-commerce precipitated by the pandemic are likely to have a Lasting Effect.
The re-opening of non-essential retail and the continued rollout of the vaccine is expected to increase activity in the rental market.
However, retailers’ subdued performance will cause retail rental values to continue to fall, by an estimated 9.5% in 2021.
For more detail, see our range of UK Retail market updates.
By 2025, domestic accommodation demand will be almost 30% ahead of 2019 levels, whereas international demand will still be marginally below.
The slow recovery of international demand will act as a drag on ‘gateway’ cities like London to a greater extent.
For the rest of 2021, we expect continued and significant domestic substitution in the leisure hotel market.
We expect that lifestyle, flexibility and design will all have a major influence on consumer accommodation choices, regardless of the reason for travel and irrespective of price point. Those that deliver on value-for-experience will yield the strongest relative revenues.
For more detail, see our latest European Hotels research.
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UK Chancellor of the Exchequer Rishi Sunak announced a new Sustainability Disclosures Requirement for large UK firms.
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What’s in store for the rest of 2021?
CLIMATE CHANGE
CLIMATE CHANGE
CLIMATE CHANGE
Property Tax
Property Tax
Property Tax
The UK is hosting the COP26 climate change talks in November and we therefore expect that the UK Government will aim to show that it is playing a leading role. This is likely to result in additional targets and commitments affecting real estate and green finance.
There will be further development of a UK Green Taxonomy aimed at defining environmentally sustainable economic activities to attract and shape green investment. If it follows the EU model on which it will be based, this is likely to classify certain real estate (and real estate transactions) as not contributing adequately to environmental sustainability.
During 2021, progress on clarifying and consolidating global reporting and disclosure standards is likely.
Demand for ‘green offices’ will accelerate the existing divergence in values between prime and secondary office property.
For more detail, read our blog on this topic.
Politics: Scotland
Politics: Scotland
Politics: Scotland
Hotels and Hospitality
Hotels and Hospitality
Hotels and Hospitality
Residential
Residential
Residential
Logistics
Logistics
Logistics
Retail
Retail
Retail
Office
Office
Office
Economy
Economy
Economy
Overview
Overview
Overview
UK economy expected to grow rapidly for the remainder of 2021 as conditions normalise (see Economy section), supported by world-leading vaccination rates.
Brexit issues likely to become increasingly normalised, with a recovery in trade patterns as tactical avoidance of the deadline by traders unwinds; the NI Protocol will remain sensitive with no obvious long-term solution.
UK financial services access to EU markets is also likely to be an ongoing negotiation for the remainder of the year.
The main risk for UK property markets in 2021 relates to slower international growth acting as a drag on UK; and concern about a vaccine-resistant virus variant which prompts winter 2021 constraints on economic activity.
All UK real estate investment will recover to around £53bn by end 2021 (2020: £42bn), matching the level achieved in 2019, though still some way off the record UK high achieved in 2015 (£70bn).
For more detail on the implications of Brexit for the UK property market, see CBRE’s Brexit research home page.