Savills : unveils 2021 cross-sector forecasts

Unveiling its predictions, the international real estate advisor says that 'need' and 'social impact' are the key trends to emerge from 2020 and will be at the heart of property investment in 2021. Residential sub-sectors such as buy to let property in the north-west, purpose-built student accommodation, and build to rent multifamily housing will perform well in response to consumer 'need', as will industrial property in London, says Savills. Demand for this group of assets is set to be underpinned by their secure income streams and potential for further yield compression in a period when the cost of money is expected to remain low, although development remains key to buying in these sectors. Forestry, meanwhile, delivers both a 'social impact', through strong environmental credentials, while also addressing a 'need' for more timber production.

Savills has taken an in-depth look at the key trends in each of the commercial, residential and rural sector in its predictions, summarised below.

James Gulliford, Savills joint head of UK investment, comments: 'The extent to which 2020 changed the way we use, appraise and value property long-term remains open to debate, however, it has certainly influenced the strength of occupational and investor demand for different asset classes in the short- to medium-term. While sub-sectors of residential and industrial look to deliver solid returns, others are set for reinvention, whether that be the retail and leisure on our high streets or the way we use offices. In both cases, demand will remain for best in class assets which can adapt to our changing lifestyle priorities. This suggests a widening gap in the performance between prime, secondary and tertiary assets and an increase in redevelopment opportunities during 2021.'

Savills commercial themes and top tips for 2021:
• The bounce in suburban high street retail trade will dissipate post the pandemic so repurposing to residential and other uses will have to rise
• The best retail warehouse parks will prove resilient to both Covid-19 and internet retailing. The rest could be repurposed for logistics, residential or life sciences
• Accessibility and less dependence on public transport will see a rise of investor and occupiers interest in business parks, with the potential for densification on some
• CBD offices will remain the core of many investor's portfolios, but a typical post-recessionary divergence between prime and secondary performance is ahead
• Logistics will remain many investors sector of choice in 2021. Pricing will be driven both by weight of investor demand and occupational fundamentals
• Income-producing alternative asset classes will become the second largest asset class after offices. Concerns around senior and student housing will raise interest in PRS, datacentres and primary health facilities
• Top pick: CBD office development. Despite the debate about the future of work, CBD offices will remain most occupiers and investors sector of choice, becoming increasingly scarce if typical post-recessionary trends play out
• Top pick: Re-purposing. The winners in post-recessionary periods are those who buy over-supplied assets cheaply with an eye to repurposing. Traditional retail, office and industrial assets could see residential, life science, datacentre and medical-related uses

Savills residential themes and top tips for 2021:
• In early 2021 transactions and prices will continue to be supported by attempts to beat the stamp duty deadline, the final days of the current incarnation of Help to Buy and the continued desire for people to find homes that meet their immediate requirements
• With the stamp duty holiday due to end around the time unemployment is expected to peak, there will be a lull in activity during the middle of the year. Some of the price gains made during 2020 may unwind. but falls are likely to be tempered by the boost to consumer confidence of an effective vaccination programme
• Later in 2021 falling unemployment and low interest rates are expected to restore some demand, however, the financial clout of buyers is likely to be tempered by the prospect of tax rises
• Residential Investment: low interest rates will provide some breathing space for those private investors not scarred by voids and arrears. The clamour for needs-based residential will continue but with increased focus on rental growth prospects and features that increase the security of the income stream
• Residential Development: a strong house-building agenda remains underpinned by planning reform and facilitating home ownership, but will be subject to disruption from increased tensions between local and national development agendas
• Top pick: Prime Central London. With prices still 20% below their 2014 peak, London continues to look good value in a historical and international context, even with a 2% non-resident buyers stamp duty surcharge due to be introduced in March
• Top pick: Single Family Build to Rent. With 63% of all privately rented homes are houses as opposed to flats, yet houses only account for 12% of Build to Rent stock there is an untapped opportunity for institutional investors to capitalise on the nascent suburban or 'single family' model

Savills rural themes and top tips for 2021:
• Savills conservatively predicts that average earnings from farmland will stay consistent at about 1% over the next five years, mirroring recent performance.
• Accountability shifts on asset owners on climate risk and impact means that some are already looking at the long-term value of sustainable land management practices over and above conventional returns from land
• Overall asset management strategy needs to reflect the true cost of carbon. The regulatory baseline on asset performance will keep getting higher, which means that an aggressive internal carbon price is needed to ensure that organisations make rational short-term investment choices for long-term security.
• Rural land is and always has been a multifunctional asset. Farmland values have always reflected returns from non-farming incomes, but stripping investment accountability back to a carbon value alone will risk appropriating an entire asset class to those able to afford carbon offsets, endangering long-term food security and environmental wellbeing, and undermining efforts to protect corporate reputation and licence to operate
• Top pick: Forestry. Stellar returns hint at a market nearing capacity, but a winner-takes-all attitude and the soft power of timber within a portfolio means demand continues to drive capital appreciation. The long-term play is that valuations reflect growing carbon agendas, repaying investors with super long-term horizons
• Top pick: Grade 1 farmland. The market for some prime Grade 1 peat arable areas has struggled in places, as commercial farmers question market returns and limit expansion plans, but the carbon potential of these soils arguably makes them the target for future policy intervention and market innovation