Stick to investment basics as question marks continue over 2022 property market

Throughout 2021 we saw investors of industrial assets experience some fantastic returns in a near-zero interest rate environment, meanwhile the office market experienced ups and downs as COVID came in waves, and retail languished amid a continued rise in e-commerce.

But what can we expect from 2022 as interest rates rise, and how can investors make the most of the property market this year? Investment agency and LPA Receivership expert Russell Miller, explores:

As we embark on 2022, it will be interesting to see just how far the industrial boom can go. The question on everyone’s lips, particularly those of investors, is can this sector get any hotter?

Investment prices have become eyewatering, but as interest rates rise, we could see this asset class plateau in 2022, as the gap between yields and property risk narrows, with rising interest rates.

The emergence of the Omicron variant at the end of 2021 had an adverse impact on the office market, as the Government once again encouraged people to work from home.

Whilst this has knocked office confidence, we expect this to rebound as 2022 progresses.

We know from what we are seeing on the ground, that businesses continue to want to create a high-quality office environment for their people, rich in amenities and founded on flexibility, as the war for talent becomes the single biggest challenge that companies face.

To help address this, particularly in light of the ‘great resignation’ which will see almost one in four UK workers plan a job change according to recent figures from Randstad businesses will continue to demand more creative, high-quality offices in 2022, to attract and inspire their people.

This will drive office rents up in 2022, and with increasing rents comes more appetite to invest in the office market, as investment returns improve – something which we haven’t seen in this market for some time.

Alongside the continued evolution of the office market in 2022, will be the ongoing debate which surrounds the future of our town centres.

What are they going to look like, how are our town centres going to work in light of the continued demise of retail and recent changes to permitted development rights?

Whilst some people went back to our town centres and returned to their former shopping habits in 2021, Omicron will undoubtedly have impacted this trend in recent weeks, despite Christmas. Some places have been quite busy and have experienced an uptick in footfall, but this has not been experienced across the board.

As a result, we are likely to continue to see structural changes in retail into 2022 as the trend for online shopping, which accounted for 28% of retail sales in 2021, continues to increase.

In answer to this, we could see a shift towards more of a residential and leisure provision in our town centres, with a focus on experienced-based shopping and we are closely monitoring how this trend progresses and what it will mean for the town centre investor.

Whilst the retail sector did see a slight improvement in 2021, albeit from a fairly low base, we expect to see yields continue to be quite soft in this sector as it remains a riskier prospect – not just because of the demise of the high street, but also because of the trend towards turnover rents from retailers.

Rather than paying a static rent, retailers have, rightly, preferred to pay a rent which reflects their profitability.

However, this has created enhanced volatility of income stream for investors, and with more uncertainty and volatility comes higher risk. Investors have shied away from paying more for that income stream as a result, with the exception of super-prime locations.

Another question mark that landlords and investors will need to consider this year, will be the end of the Moratorium on landlord action for commercial rent arrears in March.

To date, landlords haven’t been able to take any legal action against their tenants if they haven’t been able to pay their rent. When this comes to an end, we could see a flood of litigation against tenants and a potential rise in insolvency, which could further hinder the recovery of the retail and leisure sectors.

With so many big questions for the year ahead, without considering potential curve balls like Omicron V2.0, we advise investors to stick by their basic principles of investment this year.

Focus on strong locations and do your research into the underlying occupational trends in the market you want to invest in.

As always, don’t get drawn into what looks like a ‘too-good-to-be-true’ deal with high yielding investments, because there is likely to be a reason for that or a potential issue lurking in the background. Risk and return go hand in hand, so consider your personal risk appetite before considering making an offer.

Finally, explore opportunities to add value and manipulate the investment to make a better return and, where possible, avoid bidding wars on super prime opportunities which can prove challenging in those sectors like the food and convenience store market, and of course industrial and logistics market, which are experiencing such incredible demand currently.

Sticking to some of these investment basics whilst getting expert insight into the markets in which you wish to invest in, will help you to make the most of what 2022 might bring.