Should capital take advantage of ‘unjustifiably cautious valuations’?

COMMENT UK commercial real estate valuations are languishing at post-Covid lows, amid fears the sector faces banking covenants being breached and struggles with occupancy rates. I would dismiss such concerns owing to the strength of borrowers and lenders involved in the market, and the expected upward trajectory for the UK economy. From the occupational standpoint, in the years ahead, rising employment levels across diverse and well-spread UK sectors should lift the take-up of related CRE, particularly across central and northern England. Regarding the investment market, with the UK’s monetary landscape having calmed significantly and occupational demand having held up against all that was thrown at it in 2022, there is now such visibility ahead as to draw capital into the elevated yields created by unjustifiably cautious valuations. Head north True, there are areas of the UK residential and commercial property markets which carry concerns. No less true is that these are exceptions in their particular property nature. Think here of starter homes newly built over the time of Help To Buy and CRE no longer suited to the dynamic UK economy and being “priced” according to the need for it to be repurposed. And yet repurposing will be less costly and more practical than when industrial sites were laid waste in the distant decades before and required considerable decontamination expense, in both time and money, to find new purpose. Decades, it must be added, when the cost of capital was considerably higher than the UK will continue to enjoy, as keen capital flows into it from afar, drawn even more by a more than affordable currency. To give a degree of regional colour to our UK projections, we assess wide-ranging metrics and conclude that, over the coming years, the regions of central and northern England (CaNE) will top UK CRE growth league tables. To be clear, this captures the area from the West Midlands northwards towards the North West and across the Pennines to Yorkshire & Humberside and the North East. In identifying CaNE as a standout, this should in no way be considered a slight on economic prospects elsewhere within the UK. While the data suggests economic strength will be comparatively greatest across CaNE, the UK economy will, in aggregate, grow ahead of expectations. Whether we look at CRE focused on logistics, education, manufacturing, hospitality or the wide range of occupancy deemed “office”, we should expect CaNE to be the best-enabled to see the strongest occupational growth. Working patterns Looking at matters from the perspective of competitive and aspirational staff, we realise that their benefit in attending “the office” aligns with the interests of those they work for. They align because of the knowledge that persistently not being in “the office” when colleagues (and yes, rivals) do attend is a poor career choice, particularly so during one’s promotional – and most productivity-enhancing – period in work. In short, our workplace behaviours will not be greatly altered by the accursed virus that struck three years ago. The reality is that how we mostly worked had already changed before early 2020, and had done so for a raft of reasons, not least the service-based nature of the modern British economy and advances in technology. We will return to working patterns exhibited before – a mostly hybrid form, where collective working is for most of us the most productive career-driven preference, albeit not always five days a week. The modern hybrid nature of UK office work will continue to support the growth of varying occupational fit-outs, drive up demand for flexible office space and feed the desire for longer office leases. These are all positive signals for the office sector. Savvas Savouri is chief economist at Toscafund Photo courtesy of H/Advisors Maitland