Originally published January 2022.
It’s time to widen the net.
Social changes accelerated by Covid-19 are shaking the property investor community to its core as risks increase from investing in traditional ways. This is important to us all, as a material part of most of our pensions are invested in property.
Traditionally, offices and retail assets have been the focus for investors looking for a predictable income return with some capital growth over the medium term. While pension fund trustees may have varied the focus of their capital allocation between different countries, most of their real estate allocation would have been to these uses.
The shift to internet shopping, most pronounced in the UK at over 30% during the pandemic, has reduced the need for retail units, as is so clear in our high streets. Investors at best have seen a reduced level of rental income and at worst been faced with empty shops and liabilities for business rates, insurance and service charges. While these changes were evident pre-Covid, the pandemic has supercharged the change in demand.
“What two years ago was a comfortable trustee allocation to prime offices is now filled with doubt and risk”
Offices, while not wholly insulated from changes pre-Covid, have witnessed a fundamental change in risk perception during ‘the work at home if you can’ Government edict to counter virus contagion. What two years ago was a comfortable trustee allocation to prime offices is now filled with doubt and risk – will your tenant’s business survive? If it does, will it want any or as much office space? Even if your tenant does want to keep the offices, will values decline as a glut of office space becomes available and rental levels decline?
With these head winds it would be easy to assume that investors would simply turn away from property and invest in additional equity and fixed income strategies. However, such strategies are providing very low income yields and are currently viewed as ‘fully valued’, so alternative property uses have come into the spotlight, such as residential, student accommodation, care homes and infrastructure assets.
Are these prudent investments and what is driving long-term demand and supply?
Focusing on care homes and student accommodation, the driving force of demand is demographics. To quote from a recent Office for National Statistics report:
In mid-2016, there were 1.6 million people aged 85 years and over (2% of the total population); by mid-2041 this is projected to double to 3.2 million (4% of the population) and by 2066 to treble, by which time there will be 5.1 million people aged 85 years and over making up 7% of the total UK population.
Over the next decade the number of 18–20 year olds in the UK is set to expand considerably and this, combined with a significant overseas interest in British higher education, means growth in student numbers and an increasing need for student accommodation. Therefore, demographic fundamentals are likely to underpin steady real estate returns for investors in these two sectors, hence the investor focus.
