UK Real Estate: how to follow a record 2021?

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UK Real Estate: how to follow a record 2021?

2021 was a standout year for UK real estate, which delivered annualised total returns of 14.7% to the end of October, as robust income returns were complemented by the return of capital growth. This represents the highest level of annualised total returns since the pre-Brexit days of mid-2015. While we don’t expect 2022 to deliver the same capital value growth as 2021, it is likely to witness similar positive supply and demand dynamics which should maintain market momentum.
If 2021 was the year of recovery, 2022 is likely to be one of momentum. The prevailing broad-based occupational recovery is not immune to economic headwinds (the government’s recent move to “Plan B” is the most tangible evidence of this, but supply-side pressures are also likely to remain as the economy adjusts to the recovery); however, it has proved remarkably resilient through challenging circumstances. Occupier sentiment, with some notable exceptions, remains positive and we are starting to see encouraging signs of business decisions which were postponed during the pandemic begin to translate into an increase in occupier activity. In the capital markets, investor sentiment remains broadly positive, as evidenced by a recovery in transactional volumes, with significant capital reportedly raised for deployment, targeting a market expected to outperform global strategies in the short term.1 The “All Property” Net Initial Yield of 4.7%2 continues to offer highly attractive relative income attributes over gilt and base rates.
Occupational dynamics differ at sector level, and portfolio managers will have to stock pick with increasing precision to deliver outperformance. Offices, retail and alternatives – for example, hotels and leisure – emerged from the pandemic having been profoundly affected by shifting sentiment. However, our experience from the front line is more positive, and we expect these sectors to continue to recover – albeit at different speeds and to different degrees. By way of illustration, we have been advocates of low-rented convenience/discount-led retail warehouses for some time, as evidenced by our deployment of significant investment in the sector in 2021. Yields contracted sharply through the year as investor appetite for the sector increased, however it still looks attractive as an income-led proposition.
Our high conviction view towards retail warehouses is based on intelligence from our asset management colleagues indicating a vibrant occupational market with tenants benefitting from reduced competition and online resilience, and in many cases online synergies – for example, “click and collect”. We complement this high-level conviction with forensic asset-by-asset due diligence to ensure we invest in the right schemes in the right locations, let to tenants known to trade well.
Industrials continue to benefit from sustained structural imbalances in favour of landlords, which led to record levels of rental growth over the past 12 months (6.6% to the end of October 2021, as per the MSCI UK Property Monthly Index). Demand continues to increase as retail sales migrate online, and other, new occupiers enter the market, for example “dark kitchens” – shared physical premises where small businesses can set up to provide delivery-only takeaway meals. Investor sentiment, unsurprisingly, remains very positive towards the sector, and as a result we have seen significant yield compression for both logistics and multilet assets throughout the UK. Given that industrials account for more than 40% of the index composition, this has a disproportionately positive impact at market level.
Fig 1: 10-year UK commercial property rental value growth (annualised)
Fig 1: 10-year UK commercial property rental value growth (annualised)
Source: MSCI UK Monthly Index, as at September 2021.
ESG (environmental, social and governance) factors will rightly continue to influence investment decisions. Investment approaches are split broadly between those passively buying best-in-class, and those willing to actively manage portfolios to deliver building improvements. Prevailing pricing is likely to reward the latter more than the former, while the middle ground gets increasingly squeezed and at risk of stranding. We have committed to net-zero carbon in our portfolios by at least 2050, and we continue to implement workstreams aimed at quantifying works required to accelerate the trajectory towards net zero, implementing refurbishment and improvement works at a sustainable scale, and articulating the results of those activities to our clients.
Taken together, UK real estate continues to represent attractive value on an income basis, with modest but sustained growth potential in 2022.
15 December 2021
James Coke
James Coke
Fund Manager & Co-head of Institutional UK Real Estate
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UK Real Estate: how to follow a record 2021?

1 Capital Economics forecasts 2021-25, September 2021.
2 As per the MSCI UK Property Monthly Index, annualised total returns to the end October 2021.

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is an advertising document.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors.
Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial
services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number:
201101559W. This document has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities
(CE:AQA779). Registered in Hong Kong under the ce (Chapter 622), No. 1173058.

In the UK: issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

In the Middle East: this document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). This document is intended to provide distributors with information about Group products and services and is not for further
distribution. The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it.

In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is an advertising document.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors.
Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial
services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number:
201101559W. This document has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities
(CE:AQA779). Registered in Hong Kong under the ce (Chapter 622), No. 1173058.

In the UK: issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

In the Middle East: this document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). This document is intended to provide distributors with information about Group products and services and is not for further
distribution. The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it.

In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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