FULL REPORT
Not the start to the year as many had hoped. GDP growth is expected to have declined in the final quarter of 2020, and with the third lockdown imposed in the UK on 4 January, the first quarter growth will also be negative. The daily number of COVID-19 cases peaked at 68,000 on 8 January, and with hospital admissions 32% higher than they were in April, the situation is considerably worse. Moreover, there are a number of concerns surrounding the new highly infectious strain. Therefore, it is likely the current restrictions will remain in place for the majority of March.
On a positive note, the number of COVID-19 cases is now beginning to ease and the number of people receiving vaccinations is increasing. The UK is one of the first countries to begin rollout of the vaccine; just over 7 million people have received their first dose. This is more than double that of any European country. The PM’s target is to have vaccinated all of the top four priority groups (13.9m) by the middle of February. The target is somewhat ambitious as the rate at which the vaccine is being rolled out will need to double to 300,000 a day, which will be largely dependent on the resilience of the supply chain.
Vaccines are key to controlling this pandemic and bolstering the economic recovery. A successful vaccination programme will diminish the need for strict lockdowns. Resuming economic growth will also limit the impact on the labour market. Unemployment reached 5% in November and continued uncertainty surrounding COVID will weigh on labour demand.
Further positive news at the end of the year was the agreement of a new trade deal with the EU, whereby both sides will benefit from tariff and quota-free access and a level playing field. There are
are limited provisions for financial services, but both sides have agreed to establish a framework for regulatory cooperation on financial services by March 2021. In the meantime, financial services firms will be able to continue to operate with a physical presence in the other’s market.
While the conclusion of the deal has removed the threat of No Deal, we do expect some trade disruption in Q1 21 as businesses adjust to new trade agreements. That said, it is reassuring to see the Government has introduced temporary facilitations in order to minimise disruption.
The UK investment market was severely impacted by the pricing uncertainty and lockdown measures that dominated much of 2020, but the real estate industry has proved that it can adapt quickly in times of crisis. Despite quarterly volumes dropping to £4.8bn in Q2 (the lowest quarterly figure since 2009), overall 2020 volumes still reached £42.4bn thanks to strong demand in the core office, logistics and residential markets. While this was the lowest annual figure since 2012 and down 20% on 2019, European markets fared worse (-23%) with the exception of Germany (-19%).
Indeed, the UK market had a relatively positive Q4, with £12.8bn transacting - 44% up on Q3. This was still 20% below the 10-year Q4 average, but there was intense competition for core assets. In Central London, demand from overseas investors tripled to £3.3bn in Q4, almost in line with Q4 2019. With investors starved of yield in other asset classes, we should see cross-border momentum continue into 2021. A delay to progress out of lockdown and a recovery in the leasing market remains a downside risk - Central London tenant-led space has reached 6.2m sq ft, up from 1.7m sq ft a year ago - but vacancy is
still below 2009 levels. Moreover, prime London offices are now at a 50-100bps discount to other European gateway cities.
COVID-19 has accelerated the re-allocation of capital away from bricks-and-mortar retail to logistics. With big-box warehouse take-up reaching a record-high 49m sq ft, industrial investment volume increased 11% to £8.5bn, the only sector to outperform 2019. High demand saw prime logistics yields compress 50bps over the year to 3.50% - on a par with prime Central London office yields.
In turn, the long-term divergence in logistics and retail returns has gathered pace. Recent MSCI results suggest retail capital values fell 16.9% last year, while industrial values grew 6.3%.
This trend will further drive capital allocations towards logistics this year, but it will also hasten the sale of distressed and obsolete retail assets, fuelling much-needed turnover in this embattled sector. As the crisis engulfing Arcadia reinforces, the future of our high streets in a changing world will be a key theme this year.