Commercial Property Examiner

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COMMERCIAL PROPERTY EXAMINER

QUARTER FOUR | 2020 Cluttons Investment Management Commercial property examiner | Q4 2020

1. KEY TAKE AWAYS

The UK’s commercial real estate market has Ultra-low risk free rates and a low outlook been far more resilient in the face of the for interest rates remain supportive of real pandemic than was first feared in March and estate investment. April after the introduction of Lockdown 1.0.

In the 12-months to the end of December All Property total returns could recover to 2020, All Property total returns decreased to +5% in 2021 and an annualised average of -1.0% from 2.1% in 2019. 7% in the 3 years ending December 2023.

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2. SUMMARY The World Bank expects global economic Stock markets across the world celebrated All Property investment volumes increased output to expand by 4% in 2021 but at the authorisation of the first vaccines and by 21% in Q4 but nevertheless remained end of the year will still be more than 5% prospects of a return to normality. The UK 16% below their long run average. Total below its pre-pandemic level. Global growth equity markets rose 11% in Q4 but still investment volumes in 2020 were the lowest is projected to moderate to 3.8% in 2022, ended the year down 14%. The NASDAQ since 2012. weighed down by the pandemic’s lasting index ended the year 44% higher as investors damage to potential growth. continued to aggressively support tech stocks. For 2021, offices, logistics and residential are the favoured sectors for institutional Following six consecutive monthly increases, The current property initial / gilt yield gap investors and Germany, France and the UK GDP fell by 2.6% in November 2020 as the remains 4.9%; more than one standard the preferred destinations in Europe. UK entered its second national lockdown, deviation above the 10-year average. leaving the economy 8.5% below the levels The central forecast from Cluttons’ HouseView seen in February 2020. The UK’s commercial real estate market has model has been amended to reflect the been far more resilient in the face of the performance of the market in 2020 and the Some sectors of the economy had shown pandemic than was first feared in March and revised macro-economic forecasts. On balance, signs of a strong recovery from the first April after the introduction of Lockdown 1.0. we expect capital values at the All Property lockdown. Real estate benefitted from stamp level to stabilise this year together with an duty relief and built-up demand created by In Q4, All Property total returns increased to income return of +5%. All Property total the first lockdown. Hotels and restaurants, 2.0% from 0.7% in Q3. Capital growth was returns could therefore recover to +5% in 2021 hairdressers and beauty salons and gyms, and 0.6% compared to a decrease of -0.7% in and an annualised average of 7% in the 3 years arts and entertainment, however, have been Q3. Hardening All Property equivalent yields ending December 2023. However, the usual afflicted by the biggest loss of jobs. contributed a 1.1% uplift to valuations whilst caveats regarding uncertainty surrounding this All Property rental values decreased -0.4%. central forecast remain. The UK is now four weeks into its third Income returns amounted to 1.4% national lockdown of the pandemic. It is highly likely that economic activity will In the 12-months to the end of December decline further in Q1 2021. 2020, All Property total returns decreased to -1.0% from 2.1% in 2019. Capital growth was In September last year, there were 942,000 -6.3% in 2020 compared to -3.1% in 2019. All fewer workforce jobs than in September 2019 Property rental values decreased -2.3% and and 475,000 fewer than at the end of June 2020. income returns amounted to 5.6%.

Unemployment could rise by a further 800,000 at the end of the furlough scheme and peak at 2.6 million or 7.5%.

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3. THE WORLD ECONOMY 1.1 WORLD GROWTH PROJECTIONS (%) 1.2 DIFFERENCE FROM JUN 20 PROJECTIONS January’s edition of Global Economic Prospects Downside risks to this baseline predominate, 2020 2021 2022 2020 2021 produced by the World Bank notes that including the possibility of a further increase 6 3 following a collapse last year caused by the in the spread of the virus, delays in vaccine 4 4.0 4.0 2.5 COVID-19 pandemic, global economic output procurement and distribution, more severe and 3.8 3.5 3.6 2 3.3 2 is expected to expand by 4% in 2021 but at the longer-lasting effects on potential output from 1.7 0 end of the year will still be more than 5% below the pandemic, and financial stress triggered by 1 -2 its pre-pandemic level (see Chart 1.1). Global high debt levels and weak growth. As the crisis -3.6 0.9 -4.3 -4 growth is projected to moderate to 3.8% abates, policy makers need to balance the risks 0 -0.5 in 2022, weighed down by the pandemic’s from large and growing debt loads with those -6 -0.2 -7.4 -0.9 lasting damage to potential growth. from slowing the economy through premature -8 -1 fiscal tightening. World USA Euro World USA Euro The global recovery in the second half of 2020 has been stronger than expected but has recently been dampened by a resurgence of COVID-19 cases leading to weaker projections for 2021 (see Chart 1.2). Nevertheless, the world economy is expected to strengthen over the Bank’s three year forecast horizon as confidence, consumption, and trade gradually improve, supported by ongoing vaccination.

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4. THE UK ECONOMY 1.3 UK ECONOMIC GROWTH 1.4 UK SERVICE OUTPUT BY SECTOR Following six consecutive monthly increases, Manufacturing grew by 0.7% in November 110 120 GDP fell by 2.6% in November 2020 as the as the sector was relatively unscathed by rolling 3m (%) cons truc ma nufac services All Office Retail 20.2 UK entered its second national lockdown, Lockdown 2.0. Eight of its 13 sub-sectors 100 18.8 100

increased output. The largest contribution 90 3.8 All Services leaving the economy 8.5% below the levels 9.9 80 seen in February 2020. came from the motor vehicle industry, which Logistics 80 Arts grew 5.7% in November 2020. This industry is -0.3 -8.4 60 -1.0 70 The service sector of the economy grew by now 1.3% above its February 2020 level. -25.0 40 3.7% in the three months to November 2020 -7.6 FBS 60 -22.3 driven by increases in education and health Manufacturing also grew by 4.7% in the three 20 50 which together contributed 1.5%. However, months to November 2020. The manufacture 0 Feb Mar Apr May Jun Jul Aug Sep Oct Nov the sector declined by 3.4% in November and of transport equipment grew by 18.9%, 20 20 20 20 20 20 20 20 20 20 Feb Mar Apr May Jun Jul Aug Sep Oct Nov however, it is still 15.3% below its pre- is now 9.9% below the level of February 2020. 1.5 UK MANUFACTURING OUTPUT BY SECTOR (see Chart 1.3). pandemic level. The manufacture of air and

spacecraft in this sub-sector has struggled to 120 regain output and remains 35.5% below the Pharma Chemicals There were falls in output in all 14 services 110 sub-sectors between October and February level (see Chart 1.5). 100 Computers November 2020. The largest contributors 90 to this were consumer facing activities IHS Markit/CIPS January survey data suggests damaged by the reimposition of restrictions that the UK economy suffered from the 80 All Manufac steepest fall in private sector output since last 70 on interaction with their customers. Transport Accommodation and food service activities May as the government introduced Lockdown 60 including hotels and restaurants, wholesale 3.0. Services were hard-hit by restrictions 50 and retail trade, other service activities on trade and reduced consumer spending. 40 Feb Mar Apr May Jun Jul Aug Sep Oct Nov represented by hairdressers and beauty However, manufacturers recorded a small salons and gyms, and arts, entertainment and rise in production volumes, but the rate of recreation accounted for nearly 80% of the expansion eased sharply since December. fall in services (see Chart 1.4).

CGA who monitor and research the hospitality sector estimate that nearly 6,000 licensed premises were permanently closed in 2020. In fact, 9,930 sites closed and 3,955 opened for the first time. This represents a 5% contraction in the market and a 175% increase on the number of sites closed since 2019.

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The November 2020 Monetary Policy Report 1.6 MPC ECONOMIC PROJECTIONS released by the Bank of England’s MPC notes that pandemic control measures will weigh on Aug Nov 115 near-term spending to a greater extent than projected in the August 2020 Report, leading 110 to a decline in GDP in 2020 Q4. Household spending and GDP were expected to pick 105 up in 2021 Q1, as restrictions loosened. But the level of activity in the first quarter was 100 expected to remain materially lower than in 2019 Q4 (see Chart 1.6). 95 Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec 20 20 21 21 21 21 22 22 22 22 23 23 23 23 In the longer term GDP is not forecast to exceed its level in 2019 Q4 until 2022 Q1. COVID-19 and the UK’s withdrawal from the EU are likely to have persistent downward effects on output. Elevated unemployment and lower investment could reduce the supply capacity of the economy by around 1.75% by the end of 2023. The UK’s withdrawal from the EU is also likely to have a more persistent effect on supply, as cross-border trade is lower over the forecast period and weighs on productivity growth.

As the UK is now four weeks into its third national lockdown of the pandemic, it is highly likely that economic activity will decline further in Q1 2021. The barriers to trade that have been erected following the agreement reached between the UK and EU at Christmas will also act as a drag. January’s PMI report cited above also refers to weaker export orders, short-term supply chain difficulties and the largest increase in suppliers’ delivery times since the UK Manufacturing PMI survey began almost 30 years ago. [email protected] cluttonsim.com | 6 © Cluttons LLP 2021 – 2788 | 0221 Cluttons Investment Management Commercial property examiner | Q4 2020

5. OTHER ECONOMIC INDICATORS 2.1 DAILY COVID-19 CASES 2.2 CUMULATIVE COVID-19 VACCINATIONS A mutation of the virus into a deadlier and By 24 January, the NHS had administered 80,000 8,000, 000 more easily transmittable new variant and 6.82 million vaccinations (see Chart 2.2). 70,000 7,000, 000 relaxation of the lockdown over Christmas The latest 7-day rolling average is 362,307 60,000 6,000, 000 caused a surge in infection rates. And the vaccination doses administered meaning 50,000 5,000, 000 UK is now battling a third outbreak of the that the NHS is on track to vaccinate 14.8 COVID-19 virus (see Chart 2.1). Lockdown million people by 15 February. Despite this 40,000 4,000, 000 3.0 has closed all non-essential shops. success, there is as yet no indication of when 30,000 3,000, 000 Hospitality and personal care services the current restrictions will be lifted. But we 20,000 2,000, 000 including restaurants, pubs and bars, leisure do know from the experience in the first half 10,000 1,000, 000 centres and gyms, entertainment venues, of last year, economic recovery will be rapid 0 0 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 20 27 03 10 11 12 13 14 15 16 17 18 19 20 21 22 23 hairdressers and beauticians remain closed once restrictions are lifted. 20 20 20 20 20 20 20 20 20 20 21 Dec Dec Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan indefinitely. Schools, colleges and universities 2.3 12M CHANGE IN WORKFORCE 2.4 12M CHANGE IN WORKFORCE are also closed. But the difference compared There were an estimated 34.7 million workforce JOBS BY INDUSTRY JOBS BY REGION to Lockdown 1.0 announced last March is jobs in the UK at the end of September. This Agriculture Wales Real estate that travel to work is permitted if you cannot is 942,000 fewer than 12 months earlier and North East Govt reasonably do so at home. 475,000 fewer than at the end of June. Education West Mid land s Finance East Midlands Professional Yorkshire and The Humber Health The route back to normality is reliant on the Some sectors of the economy had shown signs Logistics North West ICT Northern Ireland Retail efficient roll out of the three vaccines from of a strong recovery from the first lockdown. UK A ll jobs Pfizer, Moderna and Oxford University / Astra Real Estate benefitted from stamp duty relief Construction East Water Scotland Zeneca that have been approved for use in and built up demand created by the first Manufacturing South West FBS London the UK. The biggest vaccination programme lockdown. Hotels and restaurants, hairdressers Admin in NHS history aims to have delivered a first and beauty salons and gyms, and arts and A rt s South East vaccine dose to 15 million people across entertainment, however, have been afflicted by -10.0% -7.5% -5.0% -2.5% 0.0% 2.5% 5.0% 7.5% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% the UK in the top four priority groups by 15 the biggest loss of jobs (see Chart 2.3). February. The plan is for a further 17 million people in priority cohorts 5 through to 9 to In the 12 months to the end of September be offered a vaccination opportunity by an as workforce jobs have decreased across all the yet indeterminate date in the spring. Phase UK’s regions with the exception of Wales 2 of the roll-out involving the rest of the (see Chart 2.4). London and the South East adult population numbering 21 million will be suffered from the biggest proportionate loss planned once vaccinations have been offered of jobs. In London, 92% of jobs are in the to the first 9 cohorts. broad services sector. Nationally, the service sector accounts for 84% of jobs.

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Last quarter, we considered the possibility of change when compared to a baseline day. A 2.5 GOOGLE SEARCH DATA - RETAIL & 2.6 UK CITY WORKPLACE SEARCHES a sharp rise in unemployment following the baseline day represents a normal value for WORKPLACE DESTINATIONS end of the Coronavirus Job Retention Scheme that day of the week and is the median value 20 80 70 (CJRS) commonly referred to as furlough, from the 5-week period from 3 January to 6 0 60 which was originally scheduled in November. February. These indicators support the idea of -20 50 On 5 November, England entered Lockdown an initial strong recovery in physical retailing 40 2.0 and the Treasury has now extended CJRS and a gradual return to the workplace. In -40 30 until the end of April 2021. recent weeks these trends have been put into -60 20

reverse by the re-introduction of restrictions 10 -80 At the end of December approximately on movement (see Chart 2.5). 0 UK -100 4.6 million people were on furlough leave. Lee ds London Rea ding

Feb Mar May Jun Jul Aug Oct Nov Dec Glasgow Liverpool Edinburgh 20 20 20 20 20 20 20 20 20 Bristol City

Following the scheduled end of the CJRS The number of searches for workplace Manchester Birmingham at the end of April, the OBR expects destinations in the UK’s biggest business centres unemployment to rise by a further 800,000 and conurbations compared to other UK wide and peak at 2.6 million or 7.5%. destinations suggests that people are avoiding traveling into city centres and continue to Google’s Community Mobility Reports show work from home in growing numbers, as movement trends by region, across different requested by Government (see Chart 2.6). categories of places such as retail, groceries, transport hubs and workplaces. The data shows how visitors to categorized places

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3.1 WORLD STOCK MARKETS IN 2020 3.2 UK v. WORLD EQUITY MARKETS 6. INTEREST RATES 3.13.1 World World stock stock markets markets in in 2020 2020 3.23.2 UK UK v. v.World World equity equity markets markets 3.33.3 UK UKReit Reit prices prices in 2020 in 2020 AND ASSET YIELDS 260260 50.0050.00 WorldWorld UK UK 20.020.0 In Q4 stock markets across the world celebrated Diageo. The top holdings in the world index 240240 40.0040.00 0.0 0.0 authorisation of the first vaccines and prospects are Apple, Microsoft, Amazon, Facebook, 220220 30.0030.00 of a return to normality. The UK equity Alphabet and Tesla. 200200 -20.0-20.0 20.00 markets rose 11% in Q4 having previously 20.00 180180 -40.0-40.0 fallen 32% between 21 February and 23 UK REITS fell -19% in 2020. Industrial and 10.0010.00 160160 140 March but still ended the year down 14%. logistics specialists Segro and Big Box are the 0.000.00 140 -60.0-60.0 120120 -10.00-10.00 However, the S&P 500, Nasdaq, Dax, Nikkei only two companies from the index to have a -80.0-80.0 100100 and Shanghai Composite have all recorded higher price than at the start of the year. Land -20.00 -20.00 80 80 -100.0-100.0 Dax gains on the year’s trading (see Chart 3.1). Securities price ended the year down 32% and Dax Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec

Nikk ei Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec CAC 40 CAC SHB DLN BYG Nikk ei UTG LMP CAC 40 CAC SHB DLN BYG UK 100 UTG LMP CAPC LAND BLND S&P 500 S&P GPOR SGRO BBOX CAPC NAS DA Q FTSE 100 10 11 12 13 14 15 16 17 18 19 20 S&P 500 S&P LAND BLND GPOR SGRO BBOX Sha ng he i HMSO

FTSE 100 NAS DA Q 10 11 12 13 14 15 16 17 18 19 20 is planning to sell its hotels, leisure and retail Sha ng he i HMSO The NASDAQ index ended the year 44% parks, valued at a combined £1.4 billion and 3.33.43.4 UK UK asset assetREIT yields yields PRICES Q3 Q3 2020 2020IN 2020 3.53.5 Gilt Gilt yield yield curve curve (%) (%) 3.63.6 Property Property IY - IY Gilt - Gilt yield yield gap gap higher3.1 World as stockinvestors markets continuedin 2020 to aggressively representing3.2 UK v. World equity12% marketsof the portfolio. British Land 3.3 UK Reit prices in 2020 260 1.01.0 5.5 support50.00 tech stocks. Tesla rose 696% and has was able to sell £456 millionWorld ofUK retail assets in 20.0 5.5 3m L IBOR 0.03 Sep20Sep20 Dec20Dec20 240 3m L IBOR 0.03 become40.00 the most valuable car manufacturer the 6 months to end-September but its price 5.0 5.0 0.0 220 Base Rate 0.10 in the world despite only making a fraction was down -24% at the end of the year. Base Rate 0.10 4.5 30.00 4.5 +1stdev+1stdev 200 0.5 of the cars produced by its competitors. -20.0FTAFTA 5-15y 5-15y Gilt Gilt 0.180.18 0.5 4.0 4.0 20.00 180 MSC I/ AREF mean Bitcoin, showing all the signs of a classic Intu’s administrators failed to sell the -40.0 MSC I/ AREF 2.182.18 3.5 mean 10.00 160 3.5 bubble, rose 440%. Trafford Centre and the asset was eventually FTSE 25 0 2.32 140 FTSE 25 0 2.32 0.0 3.0 -1stdev 0.00 -60.0 0.0 3.0 -1stdev transferred to the Canada Pension Plan FT Reits 120 FT Reits 3.12 2.5 -10.00 3.12 2.5 UK equity markets have systematically under- Investment Board who had an outstanding -80.0 100 FTSE 10 0 3.70 2.0 -20.00 FTSE 10 0 3.70 2.0 performed developed world markets since the loan secured against the centre. Shares Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 80 -100.0 -0.5 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec

Dax MSC I All Prop erty 5.09 -0.5 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec MSC I All Prop erty 5.09 1 3 5 7 9 11 13 15 17 19 21 23 25 10 11 12 13 14 15 16 17 18 19 20 middle of the last decade. It has beenNikk ei argued in Hammerson, another shopping centre 10 11 12 13 14 15 16 17 18 19 20 CAC 40 CAC SHB DLN BYG UTG LMP 1 3 5 7 9 11 13 15 17 19 21 23 25 CAPC S&P 500 S&P LAND BLND Maturity (yrs) GPOR SGRO BBOX

FTSE 100 NAS DA Q 10 11 12 13 14 15 16 17 18 19 20 that this is a commentary onSha ng he i the result of the specialist, had lost 82% of their value by the HMSO Maturity (yrs)

Brexit3.4 UK referendum asset yields Q3 and2020 the years of uncertainty end3.5 Gilt of yieldthe curveyear (%) (see Chart 3.3). 3.6 Property IY - Gilt yield gap as the UK struggled to reach an agreement with the EU. Now an agreement of sorts has Shaftesbury1.0 with its portfolio of central 5.5 3m L IBOR 0.03 Sep20 Dec20 been reached, so the argument continues, the London village shops had seen its share price 5.0 Base Rate 0.10 UK should benefit from a much needed boost increase by 353% between February 2009 4.5 +1stdev FTA 5-15y Gilt 0.18 0.5 to its equity markets (see Chart 3.2). and December 2019. In 2020 its market value 4.0 MSC I/ AREF mean 2.18 fell 40%. Low footfall, as many of London’s 3.5 The constituentsFTSE 25 0 of the2.32 respective indices, businesses continue to work from home 0.0 3.0 however, are revealing. The top holdings in and tourists stay away, will not have helped -1stdev FT Reits 3.12 2.5 the UK index include AstraZeneca, HSBC and investor sentiment. Moreover, 38% of the FTSE 10 0 3.70 Glaxo Smith Kline alongside Royal Dutch portfolio by market rental value is in the Food 2.0 -0.5 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec MSC I All Prop erty 5.09 Shell, BP, British American Tobacco and and Beverage1 3 5 sector.7 9 11 13 15 17 19 21 23 25 10 11 12 13 14 15 16 17 18 19 20 Maturity (yrs) [email protected] cluttonsim.com | 9 © Cluttons LLP 2021 – 2788 | 0221 3.1 World stock markets in 2020 3.2 UK v. World equity markets 3.3 UK Reit prices in 2020 3.1 World stock markets in 2020 3.2 UK v. World equity markets 3.3 UK Reit prices in 2020

260 50.00 260 World UK 20.0 50.00 World UK 20.0 240 40.00 240 40.00 0.0 220 0.0 220 30.00 30.00 200 -20.0 200 -20.0 20.00 20.00 180180 -40.0 10.00 -40.0 10.00 160160 140 -60.0 Cluttons Investment Management 0.00 0.00 140 -60.0 120120 Commercial property examiner | Q4 2020 -10.00-10.00 -80.0-80.0 100100 -20.00 -20.00 80 80 -100.0-100.0 Dax Dax Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec

Nikk ei Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec CAC 40 CAC SHB DLN BYG Nikk ei UTG LMP CAC 40 CAC SHB DLN BYG UTG LMP CAPC S&P 500 S&P LAND BLND GPOR SGRO BBOX CAPC FTSE 100 NAS DA Q 10 11 12 13 14 15 16 17 18 19 20 S&P 500 S&P LAND BLND GPOR SGRO BBOX Sha ng he i HMSO

FTSE 100 NAS DA Q 10 11 12 13 14 15 16 17 18 19 20 Sha ng he i HMSO

3.4 ASSET YIELD Q4 2020 3.5 GILT YIELD CURVE (%) Risk free assets continue to yield close to 3.4 UK3.4 assetUK asset yields yields Q3 2020Q3 2020 3.53.5 Gilt Gilt yield yield curve curve (%) (%) 3.63.6 Property Property IY IY - Gilt- Gilt yield yield gap gap 3.1 World stock markets in 2020 zero.3.2 UK The v. World Bank equity of England markets increased its asset 3.3 UK Reit prices in 2020 1.01.0 5.55.5 purchase260 programme by a further £300 50.00 World UK 20.0 3m L3m IBOR L IBOR0.030.03 Sep20Sep20 Dec20Dec20 billion240 earlier in the year and in November 5.05.0 40.00 0.0 BaseBase Rate Rate0.100.10 announced220 a further £150 billion of 4.54.5 +1stdev+1stdev 30.00 0.50.5 200 UKFTA 5-15y 5-15yFTA 5-15y Gilt Gilt 0.180.18 quantitative easing. Gilt yields have hardened -20.0 4.04.0 20.00 by 3180 bps in Q4 and are 63 bps lower than at MSCMSC I/ AREF I/ AREF 2.182.18 meanmean -40.0 3.53.5 10.00 160 the start of the year. The yield on the 5-15 FTSEUKFTSE 25025 0 25 0 2.322.32 0.00.0 3.03.0 -1stdev-1stdev 0.00 140 -60.0 year UK gilt index is 0.18% partly driven by UKFT ReitsReitsFT Reits 120 3.123.12 2.52.5 -10.00 quantitative easing and investors attempts -80.0 100 FTSEUKFTSE 10010 0 10 0 3.703.70 2.02.0 -20.00 to limit80 volatility and risk in portfolios (see -0.5-0.5 DecDec DecDec DecDec DecDec DecDec DecDec DecDec DecDec DecDec DecDec DecDec -100.0MSC IMSC All Prop I All Prop erty erty 5.095.09 Dax 10 11 12 13 14 15 16 17 18 19 20 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 1 1 3 3 5 5 7 7 9 9 11 1113 1315 15 1717 1919 2121 2323 2525 10 11 12 13 14 15 16 17 18 19 20

Nikk ei Charts 3.4). CAC 40 CAC SHB DLN BYG UTG LMP Maturity (yrs)

CAPC Maturity (yrs) S&P 500 S&P LAND BLND GPOR SGRO BBOX

FTSE 100 NAS DA Q 10 11 12 13 14 15 16 17 18 19 20 Sha ng he i HMSO 3.6 PROPERTY IY - GILT YIELD GAP 3.4 UK asset yields Q3 2020 Interest3.5 Gilt yield rates curve are (%) set to remain low for some 3.6 Property IY - Gilt yield gap time (see Chart 3.5). CPI inflation amounted to 1.0just 0.8% in the year to December 2020 5.5 3m L IBOR 0.03 Sep20 Dec20 compared to the MPC’s target rate of 2.0%. 5.0 Base Rate 0.10 The MPC projections see inflation rising to 4.5 +1stdev FTA 5-15y Gilt 0.18 0.5 2.1% at the end of 2023 based on forward 4.0 MSC I/ AREF mean 2.18 market interest rates that do not rise above 3.5 FTSE 25 0 2.32 0%. Should the economy require further 0.0 3.0 -1stdev monetary policy loosening, the MPC has FT Reits 3.12 2.5 suggested that negative interest rates remain FTSE 10 0 3.70 2.0 under-0.5 consideration. Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec MSC I All Prop erty 5.09 1 3 5 7 9 11 13 15 17 19 21 23 25 10 11 12 13 14 15 16 17 18 19 20 Maturity (yrs) The current property initial / gilt yield gap remains 4.9%; more than one standard deviation above the 10-year average (see Chart 3.6). In June 2009 as UK real estate prices reached the trough of the slump caused by the GFC, the yield gap stood at 3.7%. The current level of property yields relative to the risk free rate should provide some level of protection to UK real estate asset prices. But it is also a continuing comment on the liquidity premium required as a result of the collapse in the number of real estate transactions.

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7. COMMERCIAL PROPERTY 4.1 TOTAL RETURNS BY SECTOR 4.2 MRV GROWTH BY SECTOR MARKET PERFORMANCE 135 30 106 10

The UK’s commercial real estate market has pandemic and associated lockdown has been 25 130 105 been far more resilient in the face of the so limited. GDP fell by 5.9% during the GFC 20 5 125 15 pandemic than was first feared in March and and All Property capital values declined by 104 10 0 April after the introduction of Lockdown 1.0. 44%. In the first three quarters of 2020 the 120 5 103 115 economy has shrunk by 9.7% and it is likely 0 -5 102 -5 Index value (shaded area)Index value (shaded %) 3m (annualised Rolling

In Q4 All Property total returns increased to that the economy will have fallen further in area)Index value (shaded 110 %) 3m (annualised Rolling -1 0 -1 0 101 2.0% in Q4 from 0.7% in Q3. Capital growth Q4 and Q1 2021. Yet All Property values had 105 was 0.6% in Q4 compared to a decrease fallen by just 6.3% in 2020. The extremely -1 5 100 -2 0 100 -1 5 of -0.7% in Q3. Property equivalent yields low interest rate environment and property’s Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 15 16 17 18 19 20 15 16 17 18 19 20 hardened by 7 bps and contributed a 1.1% large premium to gilt yields must be a large All Prop erty Index All Prop erty Retai l Office Indus trial All Prop erty Index All Prop erty Retai l Office Indus trial uplift to valuations. All Property rental contributor to this. 4.3 INITIAL YIELD BY SECTOR 4.4 TOTAL RETURNS BY SEGMENT values decreased -0.4% and income returns (Q4 ANNUALISED) amounted to 1.4% (see Charts 4.1 & 4.4). These headline numbers, however, conceal a 7.0 massive gulf in performance between retail 6.5 Over the course of the last quarter, office and industrials. Retail capital values fell by rental values fell just -0.1% while industrial -2.4%. Office capital values fell by -1.3% and 6.0 rental value growth of 1.1% in Q4 remained Industrial values increased by 5.2%. Entreaties 5.5 strongly positive. However, rental values for to “stay at home” have driven internet sales 5.0 Shopping Centres, Retail Warehouses and from 21% of all retail sales in December 2019 Shops continue to fall (see Charts 4.2 & 4.5). to 31% in December 2020. As High Street 4.5

footfall has dropped off a cliff, the value of 4.0 Dec Dec Dec Dec Dec Dec In the 12-months to the end of December Rest of UK shops has fallen 25% over the 15 16 17 18 19 20 2020, All Property total returns decreased course of the year and Shopping Centre All Prop erty Retai l Office Indus trial to -1.0% from 2.1% in 2019. Capital growth values are down 27%. 4.5 MRV GROWTH BY SEGMENT 4.6 YIELD IMPACT (Q4) was -6.3% in 2020 compared to -3.1% in (Q4 ANNUALISED) 2019. Property equivalent yields softened Strong investment demand for industrials has by 24 bps in 2020 and contributed a -4.5% driven yields down to 4.5% and below 4% decrease to valuations. All Property rental for last mile logistics in London. Industrial values decreased -2.3% and income returns yields are now lower than both retail and amounted to 5.6%. office yields (see Charts 4.3 & 4.6). This is an eventuality that was very hard to conceive Given the strong positive correlation between just 5-years ago. Consequently, capital values the performance of UK commercial real estate for London industrials grew by 8% in 2020 and the economy, it continues to be a source although Rest of UK capital values fell back by of surprise that the fall out so far from the 1% over the same period. [email protected] cluttonsim.com | 11 © Cluttons LLP 2021 – 2788 | 0221 Cluttons Investment Management Commercial property examiner | Q4 2020

Tables 5.1 – 5.5 contain further performance 5.1 TOTAL RETURNS 5.2 CAPITAL GROWTH 5.3 INCOME RETURN details for UK commercial real estate in Q4 2020. Dec 3m 6m 12m Dec 3m 6m 12m Dec 3m 6m 12m

Data from Remit Consulting, a management All Property 1.0 2.0 2.7 -1.0 All Property 0.5 0.6 -0.1 -6.3 All Property 0.5 1.4 2.8 5.6 consultancy specialising in real estate, shows that in December, at the end of the September Retail 0.1 -0.6 -1.5 -10.8 Retail -0.5 -2.4 -5.0 -16.9 Retail 0.6 1.8 3.6 7.2 Quarter, there was an overall shortfall in rent Office 0.0 -0.1 0.4 -0.9 Office -0.4 -1.3 -2.0 -5.7 Office 0.4 1.3 2.5 5.0 collection from tenants of commercial properties of 20.9%. When combined with similar shortfalls Industrial 2.5 6.5 8.8 8.7 Industrial 2.1 5.2 6.3 3.6 Industrial 0.4 1.2 2.4 4.9 from the March and June quarters, Remit ANNUALISED ANNUALISED ANNUALISED calculate that the collective loss to investors between the start of the pandemic and the All Property 12.1 8.4 5.5 -1.0 All Property 5.8 2.5 -0.2 -6.3 All Property 6.0 5.8 5.7 5.6 end of the year totalled over £4.2 billion. Retail 1.5 -2.4 -3.0 -10.8 Retail -5.5 -9.3 -9.7 -16.9 Retail 7.4 7.5 7.4 7.2

Leisure and Hospitality assets have the lowest Office -0.3 -0.3 0.9 -0.9 Office -5.3 -5.1 -4.0 -5.7 Office 5.2 5.1 5.1 5.0 collection rates with just 48% collected Industrial 35.0 28.5 18.5 8.7 Industrial 28.8 22.6 13.0 3.6 Industrial 4.9 4.9 4.9 4.9 35 days after the September quarter. The retail collection rate was 68%. Offices and industrials have been more resilient with 5.4 ERV GROWTH 5.5 NET INITIAL YIELD collection rates of 88% and 85% respectively. Dec 3m 6m 12m Dec 3m 6m 12m The moratorium on forfeiting leases is due All Property 0.1 -0.4 -1.1 -2.3 All Property 5.1 5.1 5.2 5.0 to end in March. At that point landlords will need to make a decision whether to evict and Retail -0.5 -2.1 -4.2 -8.7 Retail 6.7 6.6 6.9 6.3 manage a vacancy in a poor letting market; Office 0.1 -0.1 -0.5 -0.5 Office 4.6 4.6 4.6 4.5 or negotiate with occupiers on rent holidays, concessions and monthly payments. Industrial 0.6 1.1 1.4 2.3 Industrial 4.4 4.5 4.6 4.5 ANNUALISED Factor investing or “smart beta” involves targeting quantifiable characteristics or All Property 1.0 -1.5 -2.2 -2.3 “factors” that can explain differences in asset Retail -6.0 -8.3 -8.2 -8.7 returns. This smart beta approach can be used to identify characteristics of real estate that Office 1.0 -0.3 -1.0 -0.5 drive out-performance and identify new asset Industrial 7.7 4.5 2.9 2.3 allocation strategies based on factors. Such an approach offers real estate investors new tools to segment the market in addition to traditional approaches that dissect assets by sector and geography as noted above. [email protected] cluttonsim.com | 12 © Cluttons LLP 2021 – 2788 | 0221 Cluttons Investment Management Commercial property examiner | Q4 2020

In Table 5.6 we have adopted the factor 5.6 PERFORMANCE BY STRATEGY RELATIVE TO ALL PROPERTY AVERAGE Q3 2020 approach to real estate by segmenting the market firstly by use and secondly by a Low Yield High Yield High Rent Low Rent Long Lease Short Lease key characteristic i.e. yield, rent or lease Shops -0.5 -2.9 -2.5 -0.9 1.1 -2.9 length. The numbers presented are the 3-month total return relative to the MSCI All Shopping -5.1 -7.8 -6.5 -5.1 -4.0 -3.3 Property average for Q3 2020. A heat map Centres has been used as a visual aid to pick out the Retail 0.0 -1.7 -2.5 0.2 -0.5 -1.2 under-performing segments in red and out- Warehouses performing segments in green. Central -0.2 -0.2 -0.9 0.1 0.4 -0.9 London offices Consistent with our analysis in this report, the majority of the retail segments are coloured RoSe offices 0.6 -1.1 0.1 0.2 0.6 0.0 red. Since Q2 low yielding shops have tipped into negative territory meaning that the RUK offices 0.6 -0.2 1.2 0.6 0.9 0.0 only remaining positive strategy for retail investment is shops with long leases. Industrials 1.9 1.5 2.0 1.8 1.9 2.0

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6.1 ALL PROPERTY INVESTMENT VOLUMES (£BN) 6.2 INVESTMENT TRANSACTION NOS. 8. INVESTMENT IN PROPERTY 6.16.1 All All property property investment investment volumes volumes (£bn) (£bn) 6.26.2 Investment Investment transaction transaction nos. nos. (Q2, (Q2, Q3 Q3 & & Q4) Q4) 6.36.3 Central Central London London office office Investment Investment transaction transaction nos. nos. (Q2, (Q2, Q3 Q3 & & Q4) Q4) 6.1 All(Q2, property Q3 &investment Q4) volumes (£bn) 6.2 Investment transaction nos. (Q2, Q3 & Q4) 6.3 Central London office Investment transaction nos. (Q2, Q3 & Q4) All Property investment volumes increased Q3 and Q4 investment in retail and Central 1616 2019 2020 414414 2019 2020 4 4qtr. qtr. moving moving average average 10-yr10-yr average average 16 2019 2020 2019 2020 by 21% in Q4 but nevertheless remained London offices by both domestic and overseas 4 qtr. moving average 10-yr average 4343 2019 2020 414 2019 2020 1414 43 16% below their long run average. Total investors has fallen a long way short of their 14 1212 297297 investment volumes in 2020 were the lowest historic levels. However, both sets of investors 12 297 1010 254254 since 2012 (see Chart 6.1). have more than matched their average 10 254 88 allocations to industrials (see Chart 6.4). 8 2020 1919 18 66 18 20 19 6 1515 18 Offices and industrials again made up the 126126 15 44 126 majority of investment transactions in According to the 2021 ANREV / INREV / 71471 88 22 5555 71 66 55 8 2 31 3838 25 3333 3 55 6 Q4. But across all sectors of the market, PREA Investment Intentions Survey the 31 1919 11 25 22 3 381 33 5 00 11 31 19 1 25 00 2 3 0 11 1 0 investment volumes continued to be lower COVID-19 pandemic has had little impact DecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 0707 0808 0909 1010 1111 1212 1313 1414 1515 1616 1717 1818 1919 2020 ShopShop Shopping…Shopping… Retail…Retail… Super-…Super-… OfficeOffice IndustrialIndustrial City…City… CityCity DocklandsDocklands MidtownMidtown SouthbankSouthbank West…West… than in the same quarter of 2019 (see Chart on global real estate investment plans. Very 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Shop Shopping… Retail… Super-… Office Industrial City… City Docklands Midtown Southbank West… 6.2). Nevertheless, the RICS has decided that few respondents indicated that it had led to 6.3 CENTRAL LONDON OFFICE INVESTMENT 6.4 DOMESTIC & OVERSEAS INVESTORS BY 6.1 All property investment volumes (£bn) 6.2 Investment transaction nos. (Q2, Q3 & Q4) 6.36.46.4 CentralDomestic Domestic London & & overseas overseas office Investmentinvestors investors by by transaction property property type typenos. Q2(Q2, Q2 and and Q3 Q3 &Q3 Q4)2020 20206.56.5 Bank Bank lending lending to to UK UK real real estate estate (£m) (£m) 6.66.6 Property Property funds funds AUM AUM & & cash-flow cash-flow (£m) (£m) there is sufficient market transparency despite an increase or decrease in investment plans. TRANSACTION NOS. (Q2, Q3 & Q4) 6.4 DomesticPROPERTY & overseas TYPE investors Q2, Q3 by & propertyQ4 (£M) type Q2 and Q3 20206.5 Bank lending to UK real estate (£m) 6.6 Property funds AUM & cash-flow (£m) 34,000 400 6.1 All property investment volumes (£bn) 6.22,000 Investment transaction nos. (Q2, Q3 & Q4) 6.3 Central London office Investment transaction nos. (Q2, Q3 & Q4) 34,000 400 the16 introduction of Lockdown 3.0 to not A minimum of €64.6 billion is expected414 to 2,000 260,000260,000 q'lyq'ly change change (rhs) (rhs) TotalTotal outstanding outstanding (lhs) (lhs) 10,00010,000 Q'lyQ'ly cash-flow cash-flow (rhs) (rhs) TotalTotal AUM AUM (lhs) (lhs) 34,000 400 4 qtr. moving average 10-yr average 2019 2020 2019 2020 2,000 q'ly change (rhs) Total outstanding (lhs) Q'ly cash-flow (rhs) Total AUM (lhs) 1,800 43 33,00033,000260,000 10,000200 1,800 5,000 200 require14 the return of “Material Uncertainty” be allocated16 with the majority originating 414 240,000 1,800 2019 2020 5,000 33,000 200 4 qtr. moving average 10-yr average 2019 2020 240,000 32,000 5,000 1,600 1,600 43 32,000240,000 0 0 0 32,000 qualifications to be applied to valuations of from European14 institutions. Offices, logistics 1,600 0 0 12 220,000 31,000 0 297 1,400 1,400 220,000 31,000 -200 -5,-5, 000 000 220,000 -200 31,000 most10 types of assets. However, those valued and residential12 are the favoured sectors and 297 1,400 -200 254 1,200 1,200 200,000 30,00030,000 -5, 000 200,000 -10,000 -400 with reference to trading potential, particularly 10 254 1,200 -10,000 200,000 -400 30,000 8 Germany, France and the UK the preferred 1,000 1,000 29,00029,000 -10,000 -400 20 180,000180,000 1,000 -15,000-15,000 -600 29,000 8 800 19 18 -600 Leisure6 and Hospitality assets, remain subject destinations in Europe. 800 28,00028,000180,000 -15,000 -600 15 800 20 19 -20,000 6 126 160,000 18 -20,000 -800 28,000 600 600 160,000 -800-20,000 to the4 use of the declaration. 15 27,00027,000160,000 -800 126 600 -25,000-25,000 27,000 71 4 400 400 8 140,000 -1,-25,000-1, 000 000 A search for yield 55in the current hyper-low 6 140,000 26,00026,000 2 71 5 400 8 -30,000-30,000 140,000 -1, 000 312 38 33 200 55 6 26,000 19 25 2002 3 5 25,000 -30,000-1, 200 11 31 381 33 120,000120,000 2003 25,000 -1, 200 Central0 London offices traditionally dominate interest rate environment is driving allocations 19 25 0 2 -35,000-35,000 -1, 200 0 - 11 1 0 120,000 25,000 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec - 24,000 -35,000-1, 400 UK real estate investment representing to real estate.Dec Dec DecButDec thisDec isDec temperedDec Dec Dec Decby DechighDec Dec Dec Retail CLO RUKO Industrial 100,000 - -40,000 24,000 -1, 400 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Shop Shopping… Retail… Super-… Office Industrial City… RetailCity DocklandsCLO MidtownRUKOSouthbank IndustrialWest… 100,000 -40,000 Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun 24,000 -1, 400 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Shop Shopping… Retail… Super-… Office Industrial City… Sep CitySepRetail SepDocklandsSep SepCLOMidtownSep SepSouthbankRUKOSep SepWest…SepIndustrialSep 100,000Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun -40,000 Overseas D ome sti c Overseas avg. Domestic average Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep 15 16 16 17 17 18 18 19 19 20 Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun 29% of the market over the last 20 years. levels of uncertainty surrounding the short to Overseas D ome sti c Overseas avg. Domestic average 10 11 12 13 14 15 16 17 18 19 20 15Sep 16Sep 16Sep 17Sep 17Sep 18Sep 18Sep 19Sep 19Sep 20Sep Sep 10 Overseas11 12 D13 ome sti14 c 15Overseas16 avg.17 18Domestic19 average20 15 16 16 17 17 18 18 19 19 20 10 11 12 13 14 15 16 17 18 19 20 In Q4 its share of the market rose to medium term outlook and limited liquidity. 6.5 BANK LENDING TO UK REAL ESTATE (£M) 6.4 Domestic & overseas investors by property type Q2 and Q3 20206.5 Bank6.4 lending Domestic to UK& overseas real estate investors (£m) by property type Q2 and Q3 20206.66.5 Property Bank lending funds to AUM UK real& cash-flow estate (£m) (£m) 6.6 Property funds AUM & cash-flow (£m) 33%. Nevertheless, transaction numbers The post GFC reforms of the banking system, 34,000 400 2,000 34,000 400 represented a reduction from the levels involving260,000 2,000 stricterq'ly change regulation (rhs) Total and outstanding capital (lhs) 10,000 260,000 q'lyQ'ly change cash-flow (rhs) (rhs) TotalTotal outstanding AUM (lhs) (lhs) 10,000 Q'ly cash-flow (rhs) Total AUM (lhs) 33,000 1,800 1,800 200 33,000 200 5,000 5,000 achieved in 2019 with the West End standing adequacy240,000 requirements, have reduced 240,000 1,600 1,600 32,000 32,000 0 0 0 0 out as the most resilient (see Chart 6.3). liquidity220,000 through limiting the availability of 220,000 31,000 1,400 1,400 31,000 -200 -5, 000 -5, 000-200 1,200 30,000 1,200 bank200,000 lending to the UK real estate sector 30,000200,000 -10,000 -10,000-400 -400 1,000 Since 1,000 the start of the real estate market’s post (see Chart 6.5). In Q3 £706 million was 29,000 29,000 180,000 -15,000 -600 180,000 800 -15,000 -600 800 28,000 GFC recovery in mid-2009, overseas investors 28,000 -20,000 actually withdrawn from the lending market-20,000 160,000 -800 160,000 600 -800 27,000 600 27,000 -25,000 have represented 44% of the investment after 10 400 consecutive quarters of expansion.-25,000 140,000 -1, 000 400 -1, 000 26,000 140,000 26,000 -30,000 market. Their participation fell to 38% in Q3 200 -30,000 120,000 25,000 -1, 200 200 -35,000-1, 200 120,000 - 25,000 but in Q4 overseas investors represented -35,000 24,000 -1, 400 - Retail CLO RUKO Industrial 100,000 -40,000 24,000 -1, 400 Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Retail CLO RUKO Industrial 100,000 -40,000 Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep 59% of the market in money terms. In Q2, Overseas D ome sti c Overseas avg. Domestic average Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun 15 16 16 17 17 18 18 19 19 20 Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep 10 11 12 13 14 15 16 17 18 19 20 Overseas D ome sti c Overseas avg. Domestic average 15 16 16 17 17 18 18 19 19 20 10 11 12 13 14 15 16 17 18 19 20 [email protected] cluttonsim.com | 14 © Cluttons LLP 2021 – 2788 | 0221 6.1 All property investment volumes (£bn) 6.2 Investment transaction nos. (Q2, Q3 & Q4) 6.3 Central London office Investment transaction nos. (Q2, Q3 & Q4)

16 414 4 qtr. moving average 10-yr average 2019 2020 43 2019 2020 14 12 297 10 254 8 20 19 6 18 Cluttons Investment Management 126 15 4 Commercial property examiner | Q4 2020 71 8 2 55 38 6 5 31 19 25 33 2 3 0 11 1 0 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Shop Shopping… Retail… Super-… Office Industrial City… City Docklands Midtown Southbank West… Since 2015 property funds have regularly 6.6 PROPERTY FUNDS AUM & CASH-FLOW (£M) 6.4 Domestic & overseas investors by property type Q2 and Q3 20206.5 Bank lending to UK real estate (£m) 6.6 Property funds AUM & cash-flow (£m) faced demands for redemptions from retail 34,000 400 2,000 investors.260,000 In 2016,q'ly changethe (rhs)Brexit referendumTotal outstanding (lhs) 10,000 Q'ly cash-flow (rhs) Total AUM (lhs) 1,800 33,000 200 5,000 resulted240,000 in the closure of open ended funds. 1,600 32,000 0 0 1,400 And in220,000 the last two years the lethargic 31,000 -5, 000 -200 1,200 performance200,000 of the UK economy and the 30,000 -10,000 -400 1,000 continued uncertainties surrounding Brexit 29,000 180,000 -15,000 -600 800 28,000 have resulted in an almost continuous -20,000 160,000 -800 600 27,000 -25,000 400 outflow of money from open-ended property -1, 000 140,000 26,000 -30,000 200 funds. Open-ended property funds were once 120,000 25,000 -1, 200 -35,000 - again closed to redemptions in Q1 this year. 24,000 -1, 400 Retail CLO RUKO Industrial 100,000 -40,000 Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun This trend Sepof SepnetSep disinvestmentSep Sep Sep Sep continuedSep Sep Sep Sep Overseas D ome sti c Overseas avg. Domestic average 15 16 16 17 17 18 18 19 19 20 into Q4 with10 £31011 12 million13 14 15being16 redeemed17 18 19 20 in October and November. (see Chart 6.6).

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9. OUTLOOK 7.1 IPF FORECAST EVOLUTION (NOV 20) 7.2 IPF ALL PROPERTY FORECASTS Y-BY-Y (NOV 20) November’s IPF consensus forecasts reflect The rate of decline in All Property capital the view that UK real estate values will not values continues to be slower than the pace fall as far nor as fast as initially expected at set during the GFC (see Chart 7.4). Market the outset of the pandemic lockdown. But the resilience during 2020 and the support recovery stage of the crisis is likely to be more offered by ultra-low risk free rates and the gilt prolonged. Forecasts for 2021 have been – property yield gap have caused forecasts reducing each quarter since February 2020 to be revised upwards from the bigger falls (see Chart 7.1). reflected in Q2 and Q3. Nevertheless, values are forecast to decline until the end of 2021 The consensus forecasts continue to show albeit slightly. The recovery thereafter is capital values falling in 2021. The median expected to be weak and values are unlikely total return of 2.5% in 2021 reflects a fall in to recover their previous cyclical peak until 7.3 UK COMMERCIAL TOTAL RETURN FORECASTS 7.4 MSCI CAPITAL GROWTH GFC v LOCKDOWND capital values of -2.6% and an income return the end of the forecast horizon (see Charts of 5.1%. A total return of 7.1% in 2022 is the 7.5 & 7.6).  CLO SEO RUKO L&SE I RUK I result of an increase in capital values of 0.6% (see Chart 7.2). It is unlikely that all segments of the market will suffer from the same decline in value. The Total return expectations represent an pandemic has accelerated the rise of on-line annualised average of 3% over the next shopping and the decline in capital and rental 5-years. But over the last three years of the values achievable for all types of retail assets. forecast horizon, after the current levels of Current estimates suggest that retail space is turbulence have passed, the consensus view on between 30% and 50% over supplied. the 3-year annualised average has decreased slightly to 6.6% from 6.8% in August. The reluctance of consumers to use public transport and visit city centres could work 7.5 CAPITAL VALUE FORECASTS 7.6 RENTAL VALUE FORECASTS There continue to be a wide range of to the benefit of the local high street and forecasts. Total return forecasts for 2021 out of town retail destinations with ample  CLO SEO RUKO range between +7.5% and -6.0%. The car parking. Current trends include the re- 105 102 Q4 20 101 forecast range for 2022 is 21.5% with a purposing of retail parks as logistic space. 100 maximum of 18.7% and a minimum of -2.8% Ocado have taken over a Homebase unit in 100 Q3 20 (see Chart 7.3). Merton and Amazon are redeveloping a Toys 95 99 98 R Us unit in Croydon. Tesco are using retail 90 warehouse space as dark stores to service 97 85 their on-line deliveries. Q2 20 96

80 95 Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec 19 20 20 20 20 21 21 21 21 22 22 22 22 23 23 23 23 19 20 20 20 20 21 21 21 21 22 22 22 22 23 23 23 23 [email protected] cluttonsim.com | 16 © Cluttons LLP 2021 – 2788 | 0221 Cluttons Investment Management Commercial property examiner | Q4 2020

Many column inches continue to be devoted Out-of-town business parks could see a to the future of offices. Fewer employees resurgence in demand as city centre offices working from city centre offices may reduce remain largely empty and private transport the demand for space. But social distancing is preferred to public transport. In the short requirements will pull in the opposite term, City centre vacancy rates will not rise direction and may oblige businesses to take sharply but there will be an increase in the on more space. amount of unoccupied or under-utilised grey space. However, any structural change to the Capital Economics have offered an extreme office market will play out over many years. view that the enforced remote-working experiment of recent months will cause a The huge growth in online shopping and dramatic demand shift in the office sector. home working may damage some segments In the future as many as 50% of office- of the real estate market. But it will increase based employees could be working from the demand from investors and occupiers for home at least once a week. Even allowing large warehouses or fulfilment centres and for substantial demolitions and office to last mile logistics units. It is also possible to residential conversions, vacancy rates can argue the case for suburban co-working space be expected to rise markedly in the next five and data centres to support home workers. years causing a decline in rental values and income returns.

A British Council of Offices survey lends support to this argument, finding that in the future employees at all levels will divide their time between working from home and visiting their workplace. The counterpoint is offered by the Institute of Directors who highlight the problem of managing teams remotely and believes that offices will remain valuable places for interaction and collaboration.

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10. HOUSEVIEW 8.1 3-SECTOR CAPITAL VALUE FORECASTS 8.2 RETAIL SEGMENTS CAPITAL VALUE FORECASTS The central forecast from Cluttons Brexit and December’s thin trade agreement ALL R  O I SH SC RW HouseView model has been amended to with the EU continue to act as a drag on the UK 120 105 reflect the performance of the market in economy and therefore its real estate market. 115 100

2020 and the revised macro-economic Trade in both goods and services is likely to 110 95 90 forecasts. On balance, we expect capital be lower. This reduction in trade with the EU 105 85 values at the All Property level to stabilise is expected to weigh on productivity and GDP 100 80 95 this year. Assuming that the UK escapes over the next three years. The agreement does, 75 from Lockdown 3.0 at the end of Q1 and however, end uncertainty surrounding the 85 70 the economy remains open thereafter we eventual outcome. As such it could improve 80 65 75 60 have removed any allowance for an element sentiment and encourage investors to commit Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec of tenant delinquency. Consequently, we resources to UK real estate. 19 20 20 21 21 22 22 23 23 24 24 19 20 20 21 21 22 22 23 23 24 24 expect an improved income return of +5%. 8. 3 OFFICE SEGMENTS CAPITAL 8.4 INDUSTRIAL SEGMENTS CAPITAL All Property total returns could therefore On the one side is the disappointing news VALUE FORECASTS VALUE FORECASTS recover to 5% in 2021 and 8% in 2022 with about increased transport costs and delays  CLO SEO RUKO L&SE I RUK I an annualised average of 7% in the 3 years and Scottish shell-fish rotting in quayside 115 115 ending December 2023. However, the usual lorries. HGV’s now need a Kent Access caveats regarding uncertainty surrounding Permit certifying that they have the correct 110 110 this central forecast remain. documentation to travel onward to France 105 105 before they can approach Dover. Consequently, 100 100 At the All Property level, we expect capital the M20 Euro-Tunnel terminal and Port of value growth to be weakly positive. From Dover have avoided a repeat of the traffic jams 95 95 the second half of 2021 market conditions seen before Christmas, when France closed its 90 90 should improve (see Charts 8.1 – 8.4). Retail borders. On the other side, Nissan have this Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec 19 20 20 21 21 22 22 23 23 24 24 19 20 20 21 21 22 22 23 23 24 24 assets will continue to bear the brunt of the month committed to maintain production at downturn although we continue to think it is its Sunderland car plant where the Qashqai 8.5 CLUTTONS HOUSE VIEW - 2021 RELATIVE 8.6 CLUTTONS HOUSE VIEW - 2021-2023 unlikely that they will suffer the size of capital and electric Leaf are assembled. TOTAL RETURNS (%) RELATIVE TOTAL RETURNS (%) value falls seen in the GFC (see Charts 8.5 RUK industrials RUK industrials

& 8.6). Industrials will provide some upside SE industrials RUK offices protection from the downside risks inherent RUK offices SE industrials in holding offices and particularly retail. Cent Lon shops Cent Lon shops All Property 4.9 All Property 7.4 Retail Warehouses ROSE offices

ROSE offices Retail Warehouses

Shopping Centres Cent Lon offices

RUK shops Shopping Centres

Cent Lon offices RUK shops

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We have previously highlighted the risks to Central London offices as investment banks and their advisors gradually move manpower and resources to mainland Europe. On the first day of trading in 2021,€ 6 billion of trading in European equities such as Santander, Deutsche Bank and Total switched from London to exchanges in Paris, Madrid and Frankfurt. The FT has also reported on a shift in derivative trading to New York and Amsterdam. Pre-Brexit the market in swaps used to hedge currency movements was valued at $2 trillion.

The High Street’s loss continues to be Industrials gain. The main driver for UK industrials will continue to be the growth of supply chains to support on-line shopping. At the margins, however, industrials may face some downside risks as manufacturers and logistic operators could foreseeably re-locate to mainland Europe to avoid tariffs and the accompanying paperwork.

For further details contact:

JAMIE McCOMBE The publication is issued by Cluttons Investment Head of investment management Management (UK) LLP, a wholly owned subsidiary of Cluttons LLP, authorised and regulated by the Financial +44 (0) 20 7647 7234 Conduct Authority, and the registered office is Portman [email protected] House, 2 Portman Street, London, W1H 6DU.

This publication is the sole property of Cluttons LLP and must not be copied, reproduced or transmitted in any MATTHEW PEAKE form or by any means, either in whole or in part, without Head of commercial and strategic prior written consent of Cluttons LLP. asset management +44 (0) 20 7647 7067 This publication is provided for information purposes only. The information contained in this publication has [email protected] been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty Researched on behalf of Cluttons Investment Management given, in respect of the accuracy of this information. by Alexander Property Research. The opinions expressed here represent the views of the Cluttons Investment Management (UK) LLP and should not be interpreted as investment advice. Whilst the company believes that the information is correct at the date of publication, no warranty or representation is given to this effect and no responsibility can be accepted by Cluttons to any intermediaries or users for any action taken based on the information.