My world: June 2021…
This is part of a series of articles where our contributors describe how they think things will look a year from now.
Offices will recover, thanks to desk distancing needs, and logistics will thrive – but retail will remain in the doldrums
June 2021: I decided to pay a rare visit to the office today. Staff attendance was low so I volunteered to be one of the 15 allowed on the trading floor. I was rather looking forward to it, as it’d been a while. Mask and gloves at the ready, I got to the station; there was a 300m queue (so, 150 people) and the men in orange jackets were still allowing only 20 people per carriage, but people are generally philosophical. An hour and a half: not bad, although that’s twice what it used to be. Got in at 11 am and unwrapped my packed lunch – not had one of those since my schooldays! Still, the screens were blue again.
Ever since WhitePebble made that bid for one of our larger REITs, in cash, the sector has been on fire, along with parts of the direct market. ‘Where can I get income?’ is the overarching mantra. Certainly not in the bond market, so equities and real estate look good, especially when combined – and, ooh, those with RPI-linked leases now that inflation is 3% and heading up. The Bank of England can’t raise rates much, surely, not with the housing market so weak? Inflate away the debt problem!
Overseas money was waiting for London office prices to weaken but they didn’t; buyers just couldn’t wait and sub-4% yields are now commonplace, but only on long- leased buildings – even if the assets are now over-rented. Same principle as in 1992–93: yields can come down when rents are falling. The 20% fall in rents was expected, as some tenants didn’t make it through and a swathe of serviced office space was returned to the market from distressed operators, but slowly demand has been picking up. The increase in space now required between office workers by law is helping, the trade-off being lower rents, but thankfully speculative development was low and so equilibrium is returning.
Retail is another story, of course, with its demise having accelerated to warp speed last summer. Vacancy rates of 25% have become the norm in major shopping centres and people have given up bothering with the queues for a latte, for lunch, or to get into a shop or the cinema; there’s just this flat atmosphere everywhere. Town-centre retail will reinvent itself in some form, although with so many landlords in distress it won’t be soon. Local shopping and convenience centres where rents are much more affordable are thriving, though, as a real sense of community has appeared, and that’s great to behold.
Logistics-owning companies still sit in the sweet spot, with tenant demand stronger than a year ago, and shares remain expensive – so no change from pre-covid days. The change in business rate legislation to capture online retailers hasn’t made much difference as online demand has accelerated again, homing in on 30% of all consumer expenditure now, although consumer spending overall is much reduced.
Student accommodation is tough, with numbers down both domestically and overseas. It costs a lot, and the Bank of Mum and Dad is less flush; getting a job today is perhaps more important. Let’s face it: if you can’t behave like a student when you get to university, what’s the point?
The quoted sector is outperforming the equity market but with extreme polarity, so no different from the previous five years. And it’s still the REITs with long and strong income streams that lead the way. Dividend yields for those companies may have been bid down to 3% or 4%, and premiums to NAV have been pushed up to over 20%, but that’s still attractive, especially when some REITs are still caveated by their auditors on a going-concern basis, thanks to retail. There’s still money around looking for a home in the asset class, and more M&A activity seems a certainty.
Blimey, it’s 3.30 pm and the rush hour has already started, so I’d better join the queues. I suppose we might get back to ‘the old normal’ in early 2022 – and if it feels like you’ve just lost 18 months of your life, well, at least that’s all you’ve lost.
My predictions for June 2021:
UK recession: No
Sterling vs US dollar: Lower
Sterling vs euro: Higher
UK base rate: Lower than 1%
UK RPI: Higher than 2%
Halifax UK house price index: Lower
US president: Trump
UK/EU trade deal: Yes
UK/US trade deal: No
When this is all over, I will eat, drink, and be merry…..given that it’s now Christmas!
