The impact of rising inflation on real estate is certainly a preoccupation as we enter 2022. Covid disruption, infrastructure and green investing are driving supply side inflation making new construction costs unviable. For existing assets that can benefit from inflation will do so in a big way such as real estate with RPI indexed leases, the residential rental sector and some of the hospitality sector.
Yields will continue to tighten in most sectors, driven by the scale of government economic support. It appears to make little sense, given inflation, but that’s what a capital injection ten times the size of that in the global financial crisis will achieve.
In the longer term, it will be interesting to see how the rise of green investing will play out in a world of ageing buildings. Capital will still need to be deployed, the effect on the market might be delayed but cannot be ignored.
We will also increasingly see changes arising from the impact of technology on a number of fronts. Most dramatically, driverless cars or flying cars could wipe out the need for car parking, opening up sites for development. Drone deliveries could change requirements of last mile deliveries. In the investment world, technology could democratise and grow capital flows into real estate, widening real estate deal distribution to the mass market.
In 2022, we will see investment in industrial and residential property continuing to boom as the 65% of institutional real estate capital that previously went into office and retail (according to 2019 figures) needs anew home. This is where investors feel safe given lingering Covid uncertainty.
Rental growth remains strong due to online trends and inflation. In particular, wage inflation in lower-income employment is hitting unprecedented levels, combined with limited new build coming through, driving particularly high rental growth in the private affordable housing sector.
Post Omicron, pent-up demand for UK leisure and hospitality is expected to continue to rebound strongly.Regional RevPAR (revenue per available room) in 2021 was already above 2019 and - if we successfully navigate future outbreaks - this will continue. Hospitality spend proves inelastic to rate increases in a world of higher consumer prices all around. Staffing and cost pressures remain very challenging. Within hospitality, regional hotels continue to perform strongly, driven by leisure demand and also by conferences and team building events in a world of flexible working.
New and interesting concepts are emerging, with hotels that blend F&B, lifestyle, culture and wellness providing experiential stays that capture the zeitgeist. International travel will rebound less strongly, and city centre hotels will reposition themselves to capture leisure spend.