Forget K-Shaped Recoveries, It's V-Shaped And Returns Will Grow At 6.4%

Six months ago the galaxy-brain view was that the pandemic downturn and recovery would be K-shaped for the property business, with some sectors picking up quickly and others continuing to fall fast.

Now AXA Investment Management Alts tell us that the K has morphed into a V.

This alphabetic transformation is the latest in a long list of upgrades, upticks and rethinks that all point to a gradually strengthening UK property market in 2021 and into 2022. The new normal turns out to be much like the old normal.

Justin Curlow, AXA IM Alts’ global head of research and strategy, is the latest to propose a conventional up-down economic bounce back in place of fancy theories.

“The acute revenue disruption the Covid pandemic brought to those real asset sectors reliant on physical interaction (airports, hotels, retail) versus those benefitting from lockdown measures and remote working (notably residential, data centres and logistics) led to a ‘K’ shaped sector divergence during the pandemic,” Curlow said.

“As we now transition from a pandemic disruption focus on rent collections rates towards one where all sector prospects become a bit clearer, we expect the ‘K’ to come full circle to a ‘V’ as underlying property fundamentals across the board normalise and recover.”

Curlow predicted above-inflation growth due to supply constraints in the residential, healthcare and logistics sectors, and a gradual return to normality for everyone else. This includes a swift recovery for airports and hospitality, once travel restrictions are removed, and a surge in deferred demand for office workspace once it dawns on occupiers that the new normal isn’t very unlike the old normal, and as landlords realise deals are there to be done.

Curlow said that occupiers “have effectively stacked a couple of years of lease events on top of one another which, when unleashed, will likely lead to a significant wave of take-up.” He predicted that occupiers would focus on their peak floorspace needs, not their average, meaning the cut to requirements would be less than some anticipated. He said office occupiers would think like the managers of the London Underground, planning to cope with peak capacity rather than assuming low levels of workers on the premises.

The claims come as Colliers predicted total returns growth of 6.4% for commercial property in 2021, lead by strong second-half demand for logistics property and supermarkets.

The firm predicts a 4.8% income return and 1.6% capital growth, following a modest 2.3% decline in all property total returns in 2020. 

“Latest business and consumer confidence survey data suggest that the economy will bounce back strongly in Q2," Colliers Deputy Chief Economist Oliver Kolodseike said. "This is heightened by consumer confidence rising to its highest level since before the start of the pandemic, adding to hopes that the consumer sector will help drive the economic recovery.

“Mild rental growth will result in a slight reduction in yields in the short term, but we expect yields to then generally shift out in line with the trends for the Bank of England Bank Rate and 10-year government bond yields. At the all property level, equivalent yields will compress by around 20 bps this year.” 

Colliers predicted that over the five-year forecast, industrial and supermarkets will be the best performing sectors, driven by yield compression this year and sustained rental growth over the horizon.