Time to Buckle Up and Be Bold | Andrew McDonald

Sep 01, 2021

Unprecedented is a word much overused in the current climate, albeit for obvious reasons. Throughout my 26-year career in a property agency, I’ve encountered three ‘unprecedented’ markets, so perhaps there are precedents for today’s unprecedented situation? 

The two other seismic activities which lead to the previous unprecedented markets date back to the Credit Crunch of 2008 and the Brexit vote of 2016. The years following on from the Credit Crunch were truly awful for an agent: the cogs of the industry ground to a halt and the commercial market fell foul of the economic carnage that followed. 

That said, there was no ‘new norm’ after the grey clouds lifted and blue skies returned a few years down the track. The same could be said of the mess immediately after the Brexit referendum. Thankfully, the return to the ‘old norm’ was quicker post-Brexit and within a year it would be fair to say we had returned to sunny uplands within the commercial property market. There was, though, a noticeable shift in sentiment away from the retail sector as a shaky economic position compounded nerves surrounding physical retail in light of ever-maturing online sales.

As we slowly inch our way out of the COVID mess, this time around I’m not anticipating a return to the ‘old norm’. There will be a new norm, and the exciting part is wondering what that will look like. The current market is an entrepreneur’s playground, and fortunes will be made (and lost) as investors bet on new sectors to roar out of the traps and which ones have settled into the departure lounge.


If you look at it this way (and forgive the broad generalisation), a typical pension fund will have a mixture of property assets but centred around the office, retail (including leisure) and industrial sectors. There is exposure to ‘alternative’ sectors (such as car showrooms) but otherwise they follow a fairly familiar theme but with different quality of assets on a fund-by-fund basis dependent on many things, including the income returns they offer their investors.

The ‘norm’ post-COVID is going very much to depend on how society functions after we reopen. It’s very difficult to see a large migration back towards physical retail for many years yet from sophisticated or defensive property investors. Numerous things will have to happen before pension funds get comfortable in this sector in a meaningful way. 

There will be vulture funds and those betting on a ‘recovery play’, but not enough to fill the gap delivered by the hasty retreat beat by the pension funds. It’s difficult to be accurate with retail investment property pricing, but I’ve seen quality assets easily halve in price over the last 18 months. Some secondary and tertiary assets have tumbled past this and seemingly remain in freefall. For the brave, yields in this sector of the retail market may look alluring at considerably over 10%. But this reflects a genuine risk and limited debt appetite for such product. The cash-buying funds typically tend to steer clear of these types of asset as they are switched off against excessive risk with income preservation arguably their prime consideration.

So, if we can write off retail, then where next? Well, let’s take a look at offices. You tell me what the working situation is going to be like in 12 months, 24 months, 5 years? Will we have short memories and pile back into our cubicles en masse on instruction of company bosses? Have Zoom and Microsoft teams fundamentally shifted our working patterns with the new generation of leaders coming through recognising the benefits of flexible working? Or will the truth be a hybrid version somewhere in between? 

The smart money seems to be on the hybrid situation, so what does this mean for city centre office stock with scaled down occupational demand? Central London is largely protected by significant global capital pointing this way. The same cannot be said of the other major cities. The future of large city centre offices is uncertain and it’s a brave shout for a fund manager to bet on a recovery while the situation unfolds.  

The industrial sector of the property market is flying and, for the meantime, shows no sign of slowing down, partly driven by lack of alternatives and partly driven by a continued rise in rents born of strong occupational demand. Which other sector could you say this is true for? The weight of money aimed at industrial is staggering, and deep down I do wonder whether a bubble is being created by frustrated investors hamstrung by a lack of credible alternatives.  

With the level of disruption currently being witnessed, this is a time to try new things and be bold. But be educated and bold. I hear some truly ‘alternative’ property asset classes are now on the radar and, while this currently would only account for a small fraction of deals, funds have dipped their toes into the likes of forestry land, orchards and, I learn, even cemeteries!

Buckle up and enjoy the ride over the next few years. It’s not going to be for the faint-hearted!