Last year in real estate and predictions for 2022

Real estate lending and investment opportunities abound

By Daniel Austin, CEO and Co-founder, ASK

Inflation was the talk of 2021. Throughout the year we saw a steady rise, but the expectation was, that inflationary factors, such as supply-chain bottle necks and energy prices, would subside. But, with inflation rates hitting 5.1%, a ten-year high, there may be more doubt about that. Even with the latest interest rate rise to 0.25%, investments made now need to generate returns of 4.85% inclusive of fees in order to just break-even and cash uninvested is losing money fast!

This has undoubtedly prompted increased investment into property as an inflationary hedge. So which asset classes saw most of the action and where will we see the most significant growth in 2022? Alternative property sectors have continued to reach new heights with mainstream alternatives such as student living and private rental still leading the way.

BTR boom continues

We predicted further growth of regional BTR schemes in 2021 but maybe didn’t anticipate quite such a boom. Research published by Ascend Properties in July showed a 59% year-on-year increase in BTR planning applications, equating to a total of 11,975, of which 62%, 4,151 were approved; an all-time high. Yet whilst urban flatted schemes have accelerated in popularity with young professionals, the post-pandemic flight to suburbia has driven the supply/demand dynamic towards a family market in regional areas. Multi-family schemes, where single-family homes with privacy and the benefits of community and facilities, are proving highly successful. ASK has now funded a number of both central London and regional BTR schemes. I believe this is an asset class still in its infancy and an area where we will continue to see much greater growth with BTR gaining much more momentum within the traditional suburban housing sector.

Life sciences sector has seen unprecedented growth

Investment in life sciences is breaking records in the UK. In the first three months of this year, life sciences companies raised more than half of last year's total in private funding rounds. The pandemic has clearly focused investors' interests and, given the pace of expansion in the sector, more space and labs are needed. According to a Savills report, every EUR1 billion of VC investment creates 46,000 sq m of life science real estate demand. Therefore, the EUR10.2 billion of capital invested during 2019 and 2020 indicates that approximately 474,000 sqm of new requirements from the life sciences sector will emerge during 2022. Unsurprisingly, at ASK we are now seeing clients apply for planning permission for lab-enabled space. It is certainly an area we expect to become more involved in this year.

Repurposing of our high streets is now well underway

2021 resulted in a complete u-turn in mentality as change of use became the norm. Aside from retail, high streets can provide well-located, mixed-use community space such as gyms, nurseries and food and drink offerings. Certain conversions require fairly minimal modifications and we may for example, see a particular rise in restaurant to nursery conversions. Childcare nurseries fared well during the pandemic and have now been moved into Use Class E, the same as retail and food and drink. Equally, large department stores make for ideal student or residential accommodation. However, despite the fall of many retailers during the pandemic, certain high street brands still remain strong and are anchoring shopping centre schemes. I believe customers are still looking for a retail experience, perhaps even more so since the national lockdowns.

Student living remains on the up

Despite the extensive disruption students faced during the pandemic, this academic year is seeing record numbers of 18-year olds starting in higher education in the UK. Even with a drop in foreign students, demand for accommodation remains strong in a very under-supplied area. Schemes are now very high specification, with features including cinema rooms and dedicated music practice rooms. ASK lent against a PBSA development in Falmouth which will be ready for the start of the academic year in September 2022. I think we will see this sector go from strength to strength and utilising vacant city centre sites for repurposing.

The office market has bounced back

In 2020 the future of the office was in doubt, but by Q4 we saw nearly £5bn of transactions in the London office market as confidence was renewed by the launch of the mass vaccination programme. This growth continued throughout 2021 but, it was not all been about London. Avison Young reported that in Q3 2021, Birmingham ranked first for cities outside of London, in terms of demand for grade A property, accounting for 85 per cent of total activity. However, whilst demand has returned, there is a focus on better-quality space. CBI and PWC published a survey in Q2 2021 which found 79% of financial service firms were reassessing their workspace needs and 82% were planning on deploying hybrid ways of working. This is clearly what will drive the majority of activity in 2022. ASK invested in excess of 400,000sqft of offices in 2021, including two in the Midlands. Our clients are commonly renovating to Grade A and very high sustainability standards to meet the so-called ‘flight to quality’ demand. I believe the sector will remain focused on creating Covid-friendly, high-quality, carbon-neutral buildings.

Warehousing and logistics breaks records

Soaring growth in online shopping has prompted the construction of cavernous sheds to store products during the supply chain. The rental market is also booming in this sector, with vacancies at an all-time low. Big funds and developers invested more than £3 billion in warehouses in the UK between July and September, meaning that total investment in 2021 surpassed 2020’s record £8 billion. The potential for warehousing is also underpinning land values on large scale well-located sites and is a strong option where planning for alternative schemes is not achieved.

UK hotel sector rebounds

The hotel market recovery slowly gathered pace throughout last year. Clearly benefitting from the temporary reduction in VAT, but the return to international travel released a pent-up demand, alongside domestic corporate business. Statistics show a steady rise during 2021, resulting in a 37% increase in revenue per available room in London in September. ASK backed four hotel transactions tin 2021, with a total of 547 beds. The impact of new variants may temporarily affect market confidence but the recovery so far shows this sector will ultimately bounce back.

Expectations for 2022

We will as ever, continue to face economic uncertainties, yet real estate lending and investment opportunities abound. I think we will see an increase of institutional money flowing into alternative real estate asset classes in 2022, seeking the higher returns that property investment can offer. This will ultimately create increased competition, and consequently tighter pricing and lower returns. But, lenders with flexible capital, in-depth market knowledge and the ability to structure deals to withstand volatility should continue to thrive.
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