FULL REPORT
With the next phase of easing restrictions going ahead as planned, consumers rushed to restaurants and pubs. Restaurant bookings and sales are above pre-pandemic levels; data from Barclaycard showed that spending in pubs and bars is up by 7% in the first week of re-opening compared to the same week in 2019. Similarly, Open Table data revealed bookings were 65% higher compared to pre-pandemic levels. It is worth noting that, after the first lockdown last year, bookings did not recover until August, despite help from the government's Eat Out to Help Out scheme. Unofficial data now suggests we are headed for a much quicker rebound after the third lockdown than after the first. Although retail has been much more muted since reopening in April (much earlier than indoor dining), this could be partially down to the poor weather. Nonetheless, the opening of indoor dining also provided high street retail a much-needed boost by supporting footfall.
The better-than-expected activity suggests momentum into the second quarter is likely to be much stronger than initially expected. The composite PMI index increased to 62 in May, up from 60.7. This marks the highest reading since records began in January 1998 and suggests the economy could return to pre-COVID19 levels much earlier than expected.
According to the latest Bank of England (BoE) monetary policy report, GDP is expected to rise sharply in the second quarter with growth of 4.25% as restrictions continue to ease, following a smaller than initially thought contraction in Q1 (-1.5%). Economic growth for 2021 will be further boosted by the various government support schemes that were announced in the Budget earlier this year. The range of measures, such as the capital allowance deduction providing incentives to businesses to boost investment in plant and machinery, are estimated to lift GDP by 0.75pp over the next two years.
For 2021 overall, BoE expect annual GDP growth of 7.25%, compared with their forecast of 5% in February. In turn, the BoE expect the UK economy to surpass its Q4 2019 (pre-COVID19) level by the end of 2021.
Latest returns data from MSCI shows UK real estate market performance remains polarised, despite positive economic data. 12-month total returns jumped to 4.9% in April, suggesting property returns are on an upward curve after the -2.9% recorded nine months ago, However, the gap between Industrial (16.8%) and Retail (-2.8%) is historically wide.
Central London remains quiet, but continues to show signs of fierce competition for core. Indeed, activity from UK investors fell to a ten-year low last year, UK institutional capital appears to finally be returning. One St John’s Lane, EC1, recently for sale at £95m, reportedly had over £1.0bn worth of bids from UK fund money alone. It is reportedly under offer to RLAM for almost £115.0m, reflecting c. 3.70%, potentially a new benchmark yield for the Midtown market. We continue to hear of more disposals being prepared for sale as economic and occupational demand recovers.
Industrial assets remain highly sought-after, although some are beginning to ask where value in the sector now lies after a year of record rental and capital growth. Blackstone’s proposed acquisition of developer St Modwen, at a significant share price premium, hints that value is moving up the risk curve. However, British Land's debut logistics deal in Enfield, at an initial yield 2.2%, also shows that some buyers are still underwriting significant prime distribution rental growth over the long term.
Meanwhile, the Retail sector is currently being watched with interest, particularly retail warehousing. Some investors now view retail park values as attractive after a 51% drop over five years, particularly in light of relatively resilient footfall data and potential alternative use value. April was the most active month for the sector since 2017 in terms of investment volume, boosted by Brookfield’s acquisition of Hammerson’s Retail Park portfolio for £330m / 8.6% NIY – the largest UK real estate deal of Q2 so far.
It remains very difficult to call the bottom of the retail market, but some clearly think values have now rebased enough to merit deploying capital into the sector. With household spending and footfall set to rise in the coming months, we are likely to see retail investment continue this year.
Recent economic developments in the UK have been more positive than initially anticipated. The fall in GDP in the first quarter was much smaller than previously forecast. Reducing COVID-19 cases and the easing of restrictions will support growth in the second quarter and a sharp rise in GDP. Household spending is expected to rise by 8% in Q2, and the extension of the Job Retention Scheme will support incomes, jobs and consumption further.
In light of improving economic conditions, we have upgraded our forecast for UK real estate investment volume in 2021 to c. £56.5bn. This represents a c. 20% increase on last year, ahead of the volume growth expected in France and Germany. The positive fundamentals of two key sectors for UK real estate - Central London offices and Logistics - remain key advantages that will propel investment activity.