Is The Property Market Gambling On A V-Shaped Recovery?

There is a point in a V-shaped economic recovery when all hope seems futile: That is when you are at the bottom of the V.

Maybe that’s where the UK economy is, or soon will be? Faith in the prospect of a rapid bounce back is beginning to drain away in some parts of the property market.

The Bank of England is feeling the same vibe and is reported to be close to revising its optimistic V-shaped forecast of sharp sudden fall in gross domestic product followed by a rapid climb into growth, the Financial Times reported. 

The prospect of a U-shaped, W-shaped or, worst of all, L-shaped economic future begins to loom.

The mood in some regional centres, particularly in Manchester, where a local lockdown has been imposed, has become appreciably less upbeat. Even the ebullient local character can't quite overcome the sense of trouble ahead.

“We didn’t panic in March when the national lockdown began. Others panicked, but we didn’t,” OBI Property co-founder Will Lewis said of the Manchester market. “We kept our cash and planned to get through to 1 September, expecting the final quarter to pick up. But I see now we were totally wrong because the end of the year will be tougher than anything we’ve seen so far. The worst is yet to come.”

London-based observers like CBRE Global Investors Head of UK Strategy and Research Andrew Angeli chose different language, but the sentiment is similar.

“Let’s not get overly distracted by the alphabet soup used to characterise the shape of economic performance — for the record, our view is it is probably a Nike swoosh or square root — but the focus should be on the sustainability of the recovery, the return to something that resembles normal, and on that there’s a lot of reasons for trepidation,” Angeli told Bisnow.

“There’s the spectre of a resurgent virus, though we are still seeing the first wave play out economically, and with localised lockdowns, the furlough scheme closing, there is a threat to the property market which will confound decision-making for some time.”

Angeli points to two data sets that worry him. The first is the lag in investment activity in London and the UK, compared to continental peers like the German cities and Paris. “The disconnect between Germany and London is stark,” he said.

The second is the bid-ask spreads in the German, Paris and London office property markets. “Discounts are being demanded in the UK, and whilst in Paris or Munich you are now at or better than pre-COVID pricing, in London that’s not true.”

Rent collection data, which is bad and not getting better, adds to the sense that all is definitely not well, nor likely to improve soon. With Brexit hovering, unexplained, in the background, Angeli is not surprised investors are concerned and confused.

The property markets may be waking up to this, and about time too Angeli suggested. “The property market has been on life support the last few months, it is a slow-mover as an asset class, and the mood now reminds me of March this year, as we watched the virus marching towards us,” Angeli said, reflecting that the economic consequences are now getting closer. 

Sooner or later rents will have to realign with GDP, and the long-term loss of economic capacity will have to be confronted.

Angeli agrees that there is still plenty of capital ready to spring into action if the right property opportunities present themselves in the office or logistics sector. But this niche activity should not distract from the bigger picture.

Even so, in tough times a deal is a deal and the London and regional markets could see both some clever strategic acquisitions and some more simple-minded bargain hunting. This activity looks to some observers like early evidence of the kind of recovery everyone hoped to see.

“We are already seeing evidence that some parts of the property market will see a V-shaped recovery,” Cushman & Wakefield Head of UK Research & Insight Greg Mansell said. “Since restrictions eased, investors have shown a strong interest in logistics properties, food stores and prime London offices.

“In London offices, for example, we know that over £2B of London office assets are currently under offer and another £2B are at bid stage; an encouraging rebound from the last quarter where less than £1B transacted for the first time in over 20 years. There is a backlog of deal activity that needs to work its way through the market in the coming months so we shouldn’t underestimate how quickly activity could pick up.”

Mansell says the occupational market may play catch-up, moving at a slower pace. For now the process of discerning real levels of demand, and discovering market rents, is unusually difficult.

“Regardless of V-shapes, U-shapes and so on, we will have a two-tier occupier market for all property types: businesses with cash and a secure business could recover quickly, while indebted businesses hampered by current restrictions will recover slowly, if at all,” Mansell said.

New data published by Oxford Economics suggested an easy climb out of the coronavirus crunch is unlikely, but also offers some grounds for hope.

Oxford Economics’ analysis of regional trends suggests the economic fallout will be uneven, and unlike that of the 2008-12 recession. It said the West Midlands is the worst-hit in 2020, London the most insulated. But 2021 will see their positions reversed. Oxford Economics said that 2021 will be subdued, with no region achieving a level of GVA higher than it was in 2019, but it forecast that all will do so in 2022.

It predicted that the largest 2020 decline and strongest 2021 rebound will be in the West Midlands, which by the end of this year will have experienced a 13.2% plunge in GVA. In 20201 it will rebound by 11.9%. The region’s reliance on manufacturing and the auto sector accounts for the exaggerated response.

The consultancy estimates that London, compared to the other UK regions, is experiencing the smallest reduction to its GVA, with a decline of 9.8% compared with 2019. Everywhere else, it said, the decline is in double figures.

The property market may be heading for a blinding realisation of the kind experienced by OBI's Lewis: The worst is yet to come. Or it may discover a more patchy recovery in progress by the end of the year, a recovery of the kind Oxford Economics suggest. Somewhere between a V and a U.

Contact David Thame at david.thame@bisnow.com.