My World: June 2021…
This is part of a series of articles where our contributors describe how they think things will look a year from now.
Office demand stays level, as flexible working and a move to lower density cancel each other out – but inflation is a looming worry
With business conditions improving and the second wave of covid-19 fully defeated, in June 2021 I will be explaining what the coming surge in inflation means for real estate. Bond yields will be moving out, causing acute concern that this will push cap rates out as well. To allay these fears, I will revisit 1970s real estate analysis and dig deep into CBRE’s data repository to bring a new generation up to speed on the ‘reverse yield gap’.
Real estate is not a perfect hedge against inflation, but it is a good long-term capital preserver, particularly when inflation becomes higher and more persistent. In my Property Chronicle article of this time next year, I will argue that investors should expect to see property yields slip below those of bonds as the value of inflation-linked cash flows becomes ever more apparent. Property values, I will say, are going to benefit from this surge in inflation.
For all that, the economic world will not be a happy place despite the defeat of the virus and the near resumption of normal life. The end of the 40-year bull run in government bonds will be looming, and institutional portfolios overweight in this asset class will be looking insecure, even by recent standards. Protecting pensioners and policy holders will be topic du jour.
The retreat from globalisation will be losing its appeal
as politicians and business leaders realise that ‘reshoring’ comes with a cost. Shifting production from low-cost locations in emerging markets to high-cost locations within the OECD nations, on top of the massive expansion of government debt and central bank balance sheets, will seem more (and more obviously) a recipe for inflation. The prospect of a wage-price spiral will start to disrupt the populist coalition.
I will be in the process of updating CBRE’s Real Estate 2030 report, first released in early 2019. I will conclude, based on market evidence, that covid-19 has indeed halted the drift towards higher density, at least for a while, boosting overall demand for space. However, I will also note the surge of interest by corporations in extending the fluid workplace model that was so successful during the crisis. Given that this will reduce the overall demand for space, I will conclude that these two effects have cancelled each other out. The real legacy of the crisis is the surge in interest and spending on workplace health and wellness.
In June 2021, as the next economic cycle gets into gear, I will make a mental note to remember that recessions come along every seven to nine years, which is what I always do after a recession.
Having made far fewer trips in the previous 12 months than at any time over the past two decades, I will be planning visits to my kind friends in Asia, who sent me masks, gloves and sanitiser during the time of covid-19.
My predictions for June 2021:
UK in recession: No