The pandemic will have a long tail, resulting in a rollercoaster property cycle in the coming years.
June 21st – hooray! We have a date for a return to normal (sort of). The pricing-in of some vaccine optimism in the financial markets in December 2020 and January 2021 is now looking justified, even if the pace of unlocking is to be slow. This has filtered through to the property market, as the deals edging through at a snail’s pace today are in stark contrast to the collapse of activity we saw in the first lockdown. However, the optimism should only go so far. The lesson of the 2008-09 global financial crisis was that the property market can experience a long wake following a deep recession. It will be the same this time around.
Rather than a single, uninterrupted upswing, the period 2010-19 was in fact a series of mini-cycles, punctuated by periods of volatility. The brief rally for commercial property in 2010 quickly faded in the face of the euro crisis in 2011-13, which coincided with austerity in the UK. From 2014, we then saw three different cycles – a bull run for industrial, steady growth for offices, and a quagmire for retail. From 2016 onwards, geopolitical risks (such as Brexit and the election of Trump) began to make investors nervous, and momentum receded as a widespread view developed that property was in late cycle.
The legacy of the GFC was a series of fiscal crises, austerity and the rise of political populism. This meant the property market did not experience a single tide that lifted all boats, as it had done in 2003-07. There was a fractured market, which saw periodic bouts of optimism and pessimism as well as big disparities across the sectors. Why the difference?
Given the depth of the recession and the ongoing technological disruption, a bumpy cycle reminiscent of 2010-19 appears likely for the coming years
In part it was down to the sheer scale of the economic crisis that preceded the 2010-19 cycle. In 2001-02, which we in property remember as a downswing, UK GDP actually increased by £35bn; the transition from bear to bull property market in 2003 was smooth because there had not even been a recession. In contrast, 2008-09 saw GDP shrink by £78bn. And between 2019 and 2020, it contracted by £215bn. Clearly, the current real estate market downturn is against a backdrop of huge economic pain, and we should expect significant aftershocks, as followed the GFC.
Also, the aftermath of 2008-09 was shaped not just by the GFC but also by huge structural changes brought about through technology disruption. This ushered in new ways of working, socialising, shopping and accessing media. Those structural changes are still playing out. The impact has been most evident in retail – e-commerce accounted for a whopping 35% of UK retail sales in January 2021 – and the property market is waiting with bated breath to discover how much office space will become surplus. This will become evident only once the return to the office begins, probably in the second half of this year.
Given the depth of the recession and the ongoing technological disruption, a bumpy cycle reminiscent of 2010-19 appears likely for the coming years. The second half of 2021 looks set for a relief rally. As the economy reopens from lockdown, a range of industries will see activity reawaken, turning many embattled firms back into viable tenants once again.
However, financial market speculators will be keenly watching the finances of governments around the world, looking for limping wildebeests. Escaping the currency shorters’ unwelcome gaze will probably involve austerity. This could lead to stop-go economic growth in 2022 and 2023, and play into the hands of the populist politicians again. Stand by for more election shocks in the next few years.
Meanwhile, banks will be looking to drip the property assets of which they have taken possession back into the market – something that will act as a drag on both pricing and investor sentiment. For shopping centres, this will be a major influence on the market over the next few years.
The steady vaccine rollout holds out the prospect of breaking free of lockdowns. However, we are probably now entering a period of austerity, political volatility and more tech disruption. As a result, property investment strategies should be based on long-term trends – new technology, an ageing society and the green revolution – as well as on fundamentals such as tenant covenant, lease length and asset management potential.
