uk property market trends · central london offices relatively resilient but most retail,...

Continued

For Professional Clients and/or Qualified Investors only

UK PropertyMarket Trends

The coronavirus epidemic has led to a major downgrading of economic and property market projections for 2020.

Although there is considerable uncertainty, the outlook is expected to improve as lockdown eases. Consensus forecasts point to a partial recovery in total returns in 2021, led by industrials. After a poor 2020, with an estimated minus 8.1% total return, the market anticipates improvement in the four years to end-2024 to average 6.4% pa, with performance underpinned by the income return.

Contact usUK, London – Head Office

BMO Real Estate Partners7 Seymour Street London W1H 7JW

020 7499 2244

Research

Sue Bjorkegren

[email protected]

Business Development

Jamie Kellett

[email protected]

Telephone calls may be recorded.

June 2020

Key Risks

Our review and outlook is a marketing communication providing an overview of the recent economic and property market environment. It should not be considered as advice or a recommendation to buy, sell or hold investments. Nor is it investment research and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination.

The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

The value of directly held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment.

In March 2020, a material uncertainty clause was imposed by valuers due to the impact of coronavirus on property performance.

Components of IPF Consensus Forecast All-Property Total Returns – per cent

Source: Investment Property Forum (IPF) May-20

Forecasts are provided for illustrative purposes; are not a guarantee of future performance; should not be relied upon for investment decisions; and are subject to change without notice.

Implied Income Return Capital Growth

2020 2021 20232022 2024

Total Returns

-15

-10

-5

0

5

10

The market saw a marginal improvement at the start of the year, but went into sharp reverse as lockdown was imposed in March. Much of the country closed and millions of people were furloughed. Fiscal and monetary policies have been relaxed dramatically and interest rates slashed to deal with the crisis. There has been some easing in lockdown as the second quarter progressed, but a recession appears inevitable for 2020, both in the UK and globally.

The lockdown adversely affected performance in all parts of the property market, with industrials, supermarkets and Central London offices relatively resilient but most retail, hospitality and leisure badly affected. Cash preservation has

Continued

Market Snapshot 3 months to April 2020 All Retail Offices Industrial Alternatives

Total Return -3.0 -7.1 -1.2 -0.7 -4.6Income Return 1.3 1.7 1.2 1.2 1.3Capital Growth -4.3 -8.7 -2.4 -1.9 -5.9Rental Growth -0.5 -2.2 0.2 0.5 -0.1Gross Rent Passing 0.9 -0.4 2.8 1.0 -0.2Net Initial Yield 5.3 6.8 4.7 4.6 5.0

Source: MSCI UK Monthly Property Digest Apr-20. The definition of Alternatives is the Portfolio Analysis Service definition of “other” which includes hotels, residential, leisure etc.

Three Month Rolling Average All-Property Total Return – per cent to April 2020

Source: MSCI UK Monthly Property Digest Apr-20

Past performance is not an indication of future performance.

-12 -10 -8 -6 -4 -2 0

SupermarketsOffices CityStandard IndustrialsOffices West End/MidtownDistribution WarehousingOffices Rest of South EastOffices Rest of UKAll-PropertyAlternatives Retail WarehousingStandard ShopsShopping Centres

-0.60.0

-0.8-0.9

-1.5

-3.0-1.6

-4.6-6.9

-8.6-10.2

0.0

become critical and rent collection rates have fallen, especially in the more vulnerable sectors. Government coronavirus regulation is likely to lead to further shortfalls in the current quarter.

Valuers invoked the material uncertainty clause in March, forcing some property funds to close. There has been some partial easing in recent weeks for certain segments but much of the market is still affected by this decision.

Investment activity in the first quarter was boosted by one large deal. Although some transactions have completed since lockdown, with long, indexed income especially favoured, activity has dropped dramatically. Some major deals have collapsed or not progressed and little new stock is being openly marketed. Yields are being moved out for secondary and retail stock in particular. Investors are holding back while the market is so uncertain. As yet, there is little sign of a flight of capital or forced selling but some corporates have raised funds through sale and leasebacks and some investors are looking to build up war chests.

Economic and Property Market Overview

After a solid start to the year, performance went into reverse as the coronavirus crisis intensified.

Past performance is not an indication of future performance.

UK Property Investment Activity – £ million

Source: Property Data Jun-20

Overseas Domestic Long-Run Average from 2010

2013 2014 201720162015 2018 2019 2020Apr/May

05000

10000150002000025000

Adding to the uncertainty, but rather overlooked at present, the UK is on course to leave the EU with no agreement reached during the transition period and few detailed post-Brexit plans in place.

The property market outlook is filled with uncertainty, Forecasters are generally anticipating negative total returns at the all-property level in 2020 and double-digit falls in capital values are in prospect on consensus estimates. There is a wide range of estimates, across all segments for 2020. On a sector basis, the already troubled retail and hospitality markets, are expected to bear the brunt of lockdown measures in 2020. Widespread closures make this inevitable but household spending is likely to be affected by furloughing and any future austerity. Travel is is restricted and may take time to recover, and social distancing can be difficult to implement. The industrial market may be more resilient given the shift to online, and offices in the short-term, may be supported by their occupants continuing to operate their businesses through home-working.

Continued

The Economic and Property Market Outlook

The outlook for UK commercial property is highly uncertain, but offices, industrial/distribution and some alternatives are expected to lead recovery.

Economic forecasts were sharply downgraded both for the UK and globally as the coronavirus outbreak intensified. There are hopes that the worst may be passed but there are fears of a second wave as well. The working assumption of the UK authorities seems to be for lockdown to ease gradually from June with a return to more normal conditions as the year progresses, but this is not assured. The consensus in the UK is for a sharp economic downturn in 2020 followed by some rebound in 2021 and slower but positive growth thereafter. Interest rate expectations have moved lower and consensus forecasts are for ten year gilts to stay below 2% until 2024. Uncertainty regarding the spread of the disease and the response of the authorities has meant that forecasts have been dramatically changed over short time periods. The direction of travel has been to expect a sharper downturn but a longer recovery and a “new normal” in due course. The depth of the downturn and the timing, speed and trajectory of recovery are unknown at this point. Current forecasts point to a steeper fall in GDP than that seen in the global financial crisis.

The outlook is further clouded by the global nature of the pandemic and disruptions to supply chains. A widening of distress from the economy to the banking system cannot be ruled out if the crisis is prolonged. Consensus forecasts are for a fall in 2020 global GDP, with Asia leading recovery, but the US and Europe failing to regain all the lost ground from 2020 in 2021.

UK France

2020 2021

Germany W Europe US

-10-8-6-4-202468

Consensus Real GDP Forecasts – per cent

Source: Consensus Economics, May-20

IPF Consensus Forecast Range – Total Returns 2020 – per cent

Source: IPF May-20


Office

Industrial

Standard Retail

Shopping Centre

Retail Warehouse

All Property

City Office

West End Office

-30 -25 -20 -15 -10 -5 0 5 10 15

The latest RICS survey, published in April, shows a high percentage of respondents seeing property as being in the early stage of a downturn. Both the occupational and investment markets will take time to recover from the coronavirus shock and 2020 could be a “lost year” for property.

Despite the disruption, the RICS survey also shows the bulk of respondents viewing UK property as fairly priced and the yield gap against gilts remains favourable.

Market expectations are for some improvement from 2021 onwards. The retail sector remains troubled for much of the forecast period, particularly shopping centres where rental and capital values fall for the full four years. Market forecasters expect rents and capital values to turn positive in 2021 for offices and industrials, but recovery will be at a muted pace with capital value losses not recovered fully in these markets until 2023/2024. However as with 2020, there are wide differences between the individual forecasts, especially in 2021 and 2022, regarding the timing, shape and speed of the upturn.

The crisis is likely to lead to a demand by occupiers for shorter, more flexible leases but with investors prioritising long-term secure income streams. Covenant strength will be emphasised even more in the new era.

We believe that the retail sector will see further pain. There will be more retailer administrations, especially in the mid-market space and among highly leveraged companies. The layout of shops, and retailer space needs will change, but the crisis has also pointed up some drawbacks with home delivery and click and collect. The supermarket sector may be more resilient, but it too faces operational challenges.

Continued

The office market has seen serviced offices come under tremendous pressure but the concept is here to stay. Agile working and the need for flexibility will support occupier demand and with connectivity being key. We would expect to see vibrant cities with a strong skills base thrive – and London would be included. There will be a move towards home-working and office space per worker will increase, both of which could affect rental growth potential. However, supply conditions are favourable, especially for the quality space likely to see the strongest demand.

The industrials market seems likely to benefit both from a greater move to online sales and more on-shoring. Supply dynamics are favourable. The nature of the business could well change, with more automation and a greater focus on reliability versus price. Edge of town/last mile logistics in thriving areas are expected to do well.

Alternatives are likely to present a mixed picture. There are concerns if student numbers fall and affect demand for student housing or if more courses move online. Hotels could take time to see occupancy rates recover, while healthcare still has operational problems in some areas. However, demographics and government policy may work in the sector’s favour over time, especially for residential property.

Over the five years to end-2024 we are predicting, at the all-property level, a very difficult 2020 followed by a partial rebound and subsequent slow recovery.

IPF Consensus Total Return Forecasts – Four Years Starting 2021 % pa

Source: IPF May-20


0 1 2 3 4 5 6 7 8

City Offices

West End Offices

Industrial

Retail Warehouse

All Offices

All Property

Standard Retail

Shopping Centres

7.7

7.7

7.5

7.2

6.9

5.6

6.4

4.3Early Downturn 47%Mid Downturn 17%Bottom 8%Early Upturn 10%Mid-Upturn 11%Peak 7%

Perceived Stage of Property Market Cycle

Source: RICS Apr-20

Continued

The Ritz Hotel, London

55 Colmore Row, Birmingham

325 Oxford St, London

Southbank Place, London

Honeywell House, Bracknell

Vancouver Centre, King’s Lynn

The Ritz hotel was sold for c.£700m to a Middle Eastern investor

The quarter was dominated by Blackstone’s February £4.7bn purchase of the iQ student accommodation portfolio*

The Next sale and leaseback was marketed post-lockdown and saw a swift sale of three warehouses

55 Colmore Row, Birmingham is under offer but on hold. WeWork is the tenant

The Hammerson retail parks sale collapsed after exchange as Orion refused to progress despite losing their £20m deposit

M&G reported that £197m stock under offer now had a reduced certainty of completion due to lockdown

Key Investment Transactions Data

Completed

On hold / not progressed / withdrawn

Hines bought assets in Oxford St/New Bond St from Aviva for £130m, at a 2.65% yield

Supermarkets are in demand with the Tesco store at Enfield sold at £70m, at a 4.15% yield to Realty Income. The Supermarket Income REIT and BA Pension Fund bought a stake in a Sainsbury portfolio for more than £100m in May 2020

Blackstone is reported to have “walked away” from £1bn of London office purchases – The Cabot in Canary Wharf and Southbank Place

The Kelloggs unit at Haydock, Liverpool. Overseas buyer withdrew. Now said to be on “indefinite hold”

Runnymede Council bought a Bracknell office building for £32.9m at a 5.32% yield but local authority buying has now retrenched

The sale of Marylebone House in London was completed, but with a 19% price discount

Urban Logistics bought the Crown portfolio of industrial property from L&G post-lockdown for £47.2m at a 7% yield

Despite being in special servicing, three shopping centres in Dunfermline, Loughborough and King’s Lynn are not being marketed due to poor investor sentiment

GCP has scrapped plans to develop student housing in East London

Sources: Property Data Jun-20, BMO REP Jun-20 * Subject to regulatory approval

© 2020 BMO Real Estate Partners LLP. Registered in England and Wales with number OC338377. Registered Office: 7 Seymour Street, London W1H 7JW. BMO Real Estate Partners LLP, BMO REP Asset Management Plc and BMO REP Property Management Limited are members of the BMO Financial Group and are subsidiaries of the Bank of Montreal. 986791_G20-1378 (06/20) UK, CH.

LEGAL INFORMATION

This document:

• has been issued and approved by, and is the sole responsibility of, BMO REP Asset Management plc of 7 Seymour Street, London W1H 7JW (“BMO REP”) which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (registration no. 119283).

• is for professional investors/advisers only and the information in it may not be appropriate for all persons in all jurisdictions in the world. By accepting this document, you represent and warrant to BMO REP that you are an appropriate person to receive such information.

• should not be considered as nor constitute as any investment, tax, legal or other advice and you should obtain specific professional advice before making any investment decision. Nor is it an offer or solicitation to deal in any of the investments or funds mentioned in it, by anyone in any jurisdiction in which such offer or solicitation would be unlawful or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation.

• contains confidential information belonging to BMO REP and/or third parties and is supplied to you solely for your information and may not be forwarded to any other person, reproduced or published in whole or in part for any purpose.

No representation or warranty, express or implied, is given by BMO REP or any other person as to the accuracy or completeness of the information or opinions contained in this document. Save in the case of fraud, no liability is accepted for loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information or opinion contained in this document. BMO REP Asset Management plc is a subsidiary of BMO Real Estate Partners LLP and are members of the BMO Financial Group, which is itself wholly-owned by the Bank of Montreal.

uk property market trends · central london offices relatively resilient but most retail,...

Documents