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Market drivers and impacts
The drivers of commercial property markets are complex and can vary between sectors. The relationships between the drivers described below are often interconnected, with certain themes or trends spanning multiple drivers and creating multifaceted impacts. For example, the systemic shifts created by the Covid-19 pandemic, political unrest, environmental degradation, social inequality, inflation, and economic conditions have cross-dimensional impacts on our operational environment.
Market driver
Impact
Socio-political There is no doubt we are operating in a tumultuous period. With the Covid-19 pandemic subsiding, the conflict and humanitarian crisis in Ukraine and plight of refugees around the world are front and centre of political agendas. In the wake of the Covid-19 pandemic, global vaccine equality is vital to help control the severity of future outbreaks and variants. In terms of economic recovery, the pandemic amplified many social injustices, from unemployment to access to affordable childcare, education and health inequalities. There is growing recognition that we need to transition to a fairer and greener economy. Inflationary pressures and the rising cost of living are being felt by many. Rising oil and energy prices have been amplified by the war in Ukraine and sanctions on Russia. The UK Government’s levelling up agenda involving investment in infrastructure and creation of freeports will affect market drivers in certain areas through tax benefits relating to property and business rates, planning permission and tariffs. Longer-term trends that impact the commercial property market include but are not limited to; shifting global economic power, the slowdown in economic growth in China and the impact on supply chains of China’s zero Covid policy, the shifting demographics towards an ageing population, the ongoing trend towards urbanisation and the increasing population of cities. Economic The war in Ukraine poses multiple threats to the UK economy, from trade links with Russia to a reduction in business and consumer confidence, investment sensitivity to uncertainty and links to inflation through rising energy costs and commodity prices. The annual rate of inflation recently reached a 40-year high. The rising price of gas and electricity following the increase in the cap on energy prices and the rising price of motor fuel were significant contributors. In addition, there was a transitory element to inflation, as it was anchored to the pandemic years and the reopening of the economy following lockdowns. Pay increases are not expected to keep pace, resulting in a fall in real incomes. Property provides a hedge but for some sectors more than others. Despite the Omicron variant causing prolonged uncertainty in the winter of 2021/22, GDP is now ahead of pre-pandemic levels. In the short-term, it is expected that GDP growth will be dampened by heightened inflation. There are also concerns on the supply side as bottlenecks due to Covid-19, labour shortages and wider geopolitical issues affect the global supply chain.
With the pandemic amplifying social injustices and inequalities, societal value has moved up the corporate agenda. Companies are increasingly held accountable for creating long-term positive impact to local communities and the environment. The pandemic has changed the way in which we live, work and consume. Certain trends, for example increased online retail spending and remote working, are not expected to fully revert to pre-pandemic levels. Remote working is evolving into a hybrid model, with many employers wanting to stay flexible post-pandemic. This means not only working from home, but flexitime, compressed hours, and other dynamic working practices. For office occupiers this could mean changing requirements for location, fit out, configuration and quality of space. The ‘new normal’ is still being figured out and will depend on many factors, for example sector, industry, workforce age/seniority level, company size and location. In terms of demographics, the impacts of an ageing population are complex. There are implications for the economy, labour force, fiscal balance and real estate. Urbanisation and population growth in cities brings a general increase in demand for goods and services and for property from which to manufacture, distribute and sell them. Any form of uncertainty has the potential to adversely impact economic growth. The global pandemic is not over and there is the potential for further variants to reduce vaccine efficacy and threaten public safety. In addition, some aspects of the Brexit transition have not been finalised, the cost of living has dramatically accelerated and heightened geopolitical tensions are not conducive to improving business and consumer confidence. In times of uncertainty, investors often turn to ‘real assets’ as a less volatile haven. The degree to which real estate acts as an inflation hedge is a topic of debate. Factors to consider are the length of investment period and point of investment. The speed at which rents keep pace varies across property sectors. For example, recently, industrial rental growth has comfortably outpaced CPI inflation. There is also a link with property values through rental and income growth. The gap between property yields and risk-free gilt yields is a crucial measure in the attractiveness of property investment. The Bank of England has responded to rising inflation by increasing interest rates, with further rises expected in the short-term. Despite the increases, interest rates remain low by historic standards, leaving investors to search for income in a low-rate environment.
Picton Property Income Limited Annual Report 2022
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