Sunday Supplement 13/12/2020

Dec 13, 2020

Sunday and 12 sleeps to go, or 19 until the turn of the year…..and what a year!

Recent supplements have been through why pricing has done what it has done and also what next year might look like. What to do and what not to do. This one is going to talk about this year’s winners and losers.

Winners would have to include residential property, the greatest returning major asset class of the last 30 years+. Capital growth (rightly or wrongly) and a very high % of rent paid maintained. That has to be seen as a massive win for resi and an outcome that none predicted back in April.

Subdividing that niche – social housing and niche strategies pegged to LHA rates or enhancements have had a double win. Increased LHA rates (vastly in some cases) and the surety of payment from the government. Unattractive housing benefit strategies that were highly profitable a decade ago have come back to consideration, although they are not being widely touted by the gurus again (yet!?). Geographically, seaside towns and suburbs have done well, and outer London has outperformed prime and inner. The big question here is how much of this de-urbanisation is in any way permanent?

Industrial property has also in general roared onwards as online retailing and online sales have gone through the roof, putting on years of growth within a few months. The bull market was forecast to cool or go sideways in industrial but there is still a huge demand for sites in strategic locations.

The big losers then: bricks and mortar retailers have been hammered. The move from being viewed as the bond-class to a declining risky asset class means a bloodbath for pension funds and large commercial landlords of many kinds. The high street evolution to the next iteration has been sped up just as the online demand has. Drops in desired LTVs by funders and commercial values mean a double bubble of pain. Despite this, as always, there are still opportunities for small retail space and some beacons of consistency, relatively recession proof, in the form of the discount retailers. The supermarkets have put distance between themselves and grocery is now far and away the most bond-like investment for commercial property…..comparatively bulletproof although their margins have been tested this year and brexit will continue to do that.

City centres have also taken a beating. This has not yet played out as much as it might, blocks in development without pre-signed exits may well suffer significantly in 2021. The rent premium has temporarily reversed with city centre units needing to drop 10-20% in rents whereas suburban rents are reported up 5-10%. This will not be permanent but with City centres already generally showing weak yields, this is a costly difference thinking about debt service coverage and mortgage covenants and conditions.

The other big loser at some point is bound to be the taxpayer and expect a raft more articles speculating on where they will hammer the asset owners and higher owners. On the other side is a desperate want and need for inflation above the bank of England target of 2%, and tax will not help to inflate the economy. However these rises will be political over the next few years as the politicians attempt to answer the question “who pays for all this?” And win votes along the way.

With a no-deal looming (although there’s still time and I’m not betting on either outcome but a deal at odds against looks like the value bet to me) there could be significant changes early in the new year, although I suspect the fear of the unknown is larger than the reality which will be some short-term disruption and then the free market will take over, aided, abetted and hampered by the state at various points!

Still a week and a bit left to complete deals, it will be busy next week for the solicitors amongst you I’m sure!