During a year in which traditionally high-performing property sectors like office space, tourism and leisure have turned on their head, investors are taking a moment to reconsider their options. Will 2021 be the year that alternative residential property becomes the big opportunity, or will investors seek more stable commercial ventures?
Traditional commercial investment is diversifying
Putting short to medium-term effects of the pandemic aside, traditional commercial sectors have faced a blow this year as an increase in the time spent at home, in terms of both employment and leisure, has accelerated the growth of long-term trends such as remote working, domestic holiday lettings and subscription-model ecommerce. Leaving the future of bricks and mortar offices, hotels and retail units uncertain, investors are having to diversify portfolios or seek alternative arrangements.
Growing UK logistics
In a world where we are so used to almost-instant access to goods, growth within ecommerce and urban logistics was on the horizon long before the coronavirus crisis. However, significant increases in online trade during the lockdown period has led to the logistics sector gaining prominence as an essential type of business. Coupled with an ever-increasing shortage of space for businesses, the market is becoming an increasingly attractive investment option, as well as a good opportunity for portfolio diversification.
Turnover-based leasing and sub-letting
Research from Savills suggests that many retailers are looking to recalibrate leasing arrangements to move to a turnover rent provision, preserving the economic viability for an industry under threat, yet taking certainty over income away from landlords[1].
Forbes also notes a trend currently taking shape in the US, in which sub-leases are becoming available for spaces once dominated by large commercial enterprises[2]. Both suggest a changing relationship and shift in power between commercial tenant and landlord, potentially giving way for new and diverse businesses to emerge on temporary, pop-up or rent provision terms.
Changing office landscapes and flex operators
Another commercial area seeing growth is the flex-space operator model, in which property landlords are teaming up with specialist flexible space operators to provide a new type of offering and take greater shares of revenue, rather than simply leasing to operators[3]. JLL predicts that this area will see room for new and smaller entrants from elsewhere in the real estate market.
However, similar to the lack of certainty around sub-leasing income, flexible working spaces will present challenges to landlords in terms of shorter leases, but given that more businesses and employees are looking for flexible spaces for the foreseeable future, it’s an opportunity many can’t be seen to miss.
Operational real estate
As highlighted within our recent post-lockdown analysis, operational residential sectors such as purpose built student accommodation (PBSA), build to rent (BTR) and retirement living are continuing strong and, in some cases, accelerating as the effects of coronavirus influence living trends and demand.
Despite a shaky few months within the student accommodation sector, the recent exam results U-turn has brought optimism and opportunity for growth back to the ever-resilient market. James Duncan, Head of Real Estate at Winckworth Sherwood, notes that the key to coming out on top is in flexibility – particularly where rental payments will become a larger concern for students[4]. This is in line with recent insight provided by Brian Welsh of Nido Student who, after responding to student needs quickly, sympathetically and flexibly at the start of the pandemic, have been operating a near-business as usual model since.
Furthermore, operational accommodation providers could also soon benefit from increases in working and studying from home and decreases in city centre commutes, as less focus on location will open up more sites for development. Operators that emphasise their product and experience over location can maximise on-site amenities and investment in state-of-the-art connectivity, whilst giving investment funds access to premium products and long-term returns.
The 4th annual Alternative Residential Property Conference is taking place on 14th October, where we will be discussing the changing trends in alternative sectors and analysing the effects of covid-19.
Click here to book your place – due to limited capacity as a result of social distancing, we expect places to book quickly.
[1] https://www.savills.co.uk/blog/article/302384/commercial-property/the-future-of-turnover-leases-in-a-post-covid-retail-market.aspx
[2] https://www.forbes.com/sites/forbesrealestatecouncil/2020/09/08/14-big-factors-driving-commercial-real-estate-trends-this-year/#4d8da9cf7ee8
[3] https://www.jll.co.uk/en/trends-and-insights/investor/why-landlords-are-teaming-up-with-flex-space-operators
[4] https://www.investmentweek.co.uk/opinion/4019494/exam-turn-provides-opportunity-student-sector-growth