UK commercial real estate (CRE) valuations are languishing at post-COVID lows, amid fears the sector faces “banking covenants being breached” and struggles with regard to occupancy. In this short article, we draw upon new Toscafund research which simply dismisses all such concerns.
From the occupational standpoint, in the years ahead, rising employment across a range of diverse well-spread UK sectors will impressively lift the take-up of related CRE, particularly across Central and Northern England (CaNE). Regarding the investment market, with the UK’s monetary landscape having calmed significantly, albeit being spooked again more recently, and occupational demand having held up against all that was thrown at it through 2022, there is now such visibility ahead to draw capital into the elevated yields created by unjustifiably cautious valuations.
True, there are areas of the UK residential and commercial property markets which carry concerns. No less true is that these are exceptions in their particular property nature. Think here of starter homes newly built over the time of Help-To-Buy (HTB), and CRE no longer suited to the dynamic UK economy and being “priced” according to the need for it to be repurposed. And yet, repurposing will be less costly and more practical than when industrial sites were laid waste in the distant decades before, and required considerable decontamination expense, in time and money, to find new purpose. Decades, it must be added, when the cost of capital was considerably higher than the UK will continue to enjoy, as keen capital flows into it from afar, drawn even more by a more than affordable currency.
To give a degree of regional colour to our UK CRE projections, we assess various wide-ranging metrics, and conclude that over the coming years, CaNE will top UK CRE growth league tables.
To be clear, CaNE captures the area from the West Midlands, northwards towards Yorkshire and Humberside, the North East and across the Pennines to the North West. In identifying CaNE as a standout this should in no way be considered a slight on economic prospects elsewhere within the UK. While the data suggests economic strength will be comparatively greatest across CaNE, the UK economy will, in aggregate, grow ahead of expectations.
For whether we consider CRE focused on logistics, education, manufacturing, hospitality, or the wide range of occupancy deemed “office,” we should expect CaNE to be best enabled to see the strongest occupational growth.
Looking at matters from the perspective of competitive and aspirational staff, we actually realise that their benefit in attending “the office,” align with the interests of those they work for. They align because of the knowledge that persistently not being in “the office” when colleagues (and, yes, rivals) do attend, is a poor career choice, particularly so during one’s promotional – and most productivity enhancing – period in work. In short, our workplace behaviours will not be greatly altered by the accursed virus that struck three years ago. The reality is that how we mostly worked had already changed before early 2020, doing so for a raft of reasons, not least the service-based nature of the modern British economy and advances in technology. We will return to working patterns exhibited before; a mostly hybrid form, where collective working is for most of us the most productive career driven preference, albeit not always five days a week.
The modern hybrid nature of UK office work will continue to support the growth of varying occupational fit-outs, drive up demand for flexible office space, and feed the desire for longer office leases. All positive signals for the office sector of CRE.
To conclude, there is now sufficient visibility for the UK economy to draw financial capital into the elevated CRE yields created by unjustifiably cautious valuations and an undervalued currency.
For further detail see Toscafund Discussion Paper “UK CRE investing – My Call CaNE, June 2023.”
