Joint SPR-IPF Webinar: Outlook for UK Property 2021, 12 Jan 2021

With the advent of coronavirus vaccines, the UK economy is expected to return to growth in the second half of 2021, proposed Melanie Baker of Royal London Asset Management in her presentation at the start of the webinar. The shape of the recovery will depend on whether the UK’s ‘crisis underperformance’ in global terms means there is room for a stronger bounce-back than elsewhere, or if it has caused lasting long-term economic damage.  GDP remains well below its level at the start of 2020, but at least business confidence has revived.  Much will also depend on how the government looks to unwind its fiscal expansion – too fast could be disastrous – and how households use the savings they have built up during the lockdowns.  This may give a boost if consumers don’t prove too cautious, although the danger of inflation always lurks in the background.

Bill Dinning of Waverton Investment Management agreed that inflation could be ‘the endgame’, particularly if recent indications from US inflation swaps data are borne out elsewhere.  In his presentation on prospects across the asset classes, he noted that inflation would effectively take bond returns negative and end their long bull run.  As for bonds, stock values also look elevated based on their long-term PE ratio trends, although this is more pronounced in the US than the UK, where ‘there is a lot of bad news’ already in the price – much of it relating to Brexit – he proposed.  Still, all of this bodes well for allocations to real estate with its inflation-related cash flows, as well as the possibilities for investors to pursue their increasingly important societal goals.

The social role of real estate was uppermost in the mind of Chris Taylor of Federated Hermes, who emphasised the importance of ‘transformative urban regeneration’ for allowing investment in the sector to achieve its full potential.  He emphasised that given the dramatic structural trends now disrupting the asset class, especially in terms of technology and climate risk, ‘relevant’ property looks set to outperform obsolescent assets in an increasingly bifurcated market.  This means that investors will need to be agile in order to prosper, but also that it is important for capital to be ‘patient’ when seeking to make a social impact and to invest in ‘places rather than buildings.’

In the audience Q&A, led by Neil Slater of Aberdeen Standard Investments, Taylor suggested that investing responsibly did not have to mean sacrificing financial performance, citing the example of Hermes’ HPUT portfolio, which had outperformed as well as reducing its carbon emissions by 9% over 10 years. Given the government’s levelling up agenda, another questioner wondered if real estate would be able to compete with infrastructure in the private assets space.  Dinning and Taylor agreed thought that it would, with plenty of room for both in the portfolio as investors reallocated away from bonds. Indeed, infrastructure often supports real estate investment, noted Taylor – for instance, this will be the case when Crossrail opens.  

Political risks remain on the horizon, notably the possibility of Scottish independence and further disruption from Brexit. But Baker’s biggest concern for the near term was that Covid vaccines might not be as effective as hoped in protecting against new strains of the virus.

Tim Horsey