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Marshmallows tomorrow

The UK government’s decision to delay full reopening of the UK for a further month was unwelcome news for many but it won’t derail the economic recovery. On the bright side, UK property investors have an extended buying opportunity.

Delayed gratification may not be everyone’s cup of tea but, as followers of the Stanford marshmallow experiment[1] will attest, good things come to those who wait. After all, how much changed as a result of the government’s announcement?

Not that much. Large sections of the UK economy are already open for business. The areas most affected by the delay will be larger-capacity sports, leisure and entertainment businesses and the travel sector.

A recent report by Oxford Economics[2], finds that the four-week delay to UK opening will only have a “mild impact on the short-term growth outlook”. The overall effect will be a delay in recovery, not a derailing, with 2021’s GDP growth forecast trimmed to 7.7% from 8.0% and the 2022 forecast rising from 5.9% to 6.2%.

On the rebound

The economic recovery will be generally positive for the UK property market as stronger economic growth and momentum leads to a rebound in occupier and investor confidence and activity.

An important positive driver of demand will be global investors increasing their allocations to UK property (particularly now that a basic Brexit deal has been secured) as a recovery investment, a source of income and to diversify away from other asset classes.

The UK has long been a beneficiary of this inward investment and is one of the most sought-after property investment destinations in the world. Higher yields on UK commercial property relative to other markets, together with the UK market’s high levels of liquidity and transparency and the ability to transact large deals are key attractions for global investors seeking to invest at scale.

The scores on the doors

Not all property markets and sectors will recover at the same pace. First, the bad news. Hospitality, retail and leisure sectors have been the most affected by the pandemic. Their recovery will take time given the amount of “scarring” caused by prolonged closures, continuing social distancing measures and potential rises in unemployment as government support schemes, such as furlough, wind down. Some areas of the hospitality industry are struggling to meet demand because of a shortage of suitable staff caused by a sharp decline in labour mobility.

Department stores and mid-market fashion stores face a tough time. We can expect to see further store closures and refinancing and lease modifications to help mitigate the difficult trading conditions and as they have failed to adapt to changing consumer shopping behaviour. Retail areas that are likely to fare somewhat better include destination retailing, retail warehousing, local

convenience and service-driven stores, and supermarkets. Overall, however, rents will continue to fall in most retail sectors.

Looking longer term, the repurposing of the UK’s approximately 30-40% oversupply of retail floorspace to other uses – such as mixed-use developments that combine housing with retail outlets, services and leisure facilities – is a project that will continue for some years. Larger cities are better placed to make this transition. Smaller cities and towns may need to think creatively or even radically if they are to successfully turn around “stranded assets” such as obsolete shopping centres and abandoned high streets. 

Logistics enjoyed a good pandemic as consumers were forced to buy online. The good times are likely to tail off a bit for logistics as retail stores reopen but the sector will still grow, particularly given demand for last mile urban delivery hubs and fulfilment centres. Concerns that there is some overheating in logistics are not unfounded; investors can still look forward to positive rental growth, albeit at a slower pace than they may be used to, but prime yields in the sector are now trading at around 3.5%, below office yields.

Offices will be changing. Long-term trends such as the growth of working from home and hybrid working have been accelerated by the pandemic, with the result that occupier demand is likely to focus on the best quality grade A offices available in city centres, well-located suburban hubs and the ‘Big 6’ cities[3]. Occupiers are likely to demand more flexible office designs to accommodate hybrid working, together with wellbeing features such as air purification and higher standards of sustainability.

On which subject, we can expect to hear a lot more about ESG. Investing in assets with enhanced sustainability, climate resilience and wellbeing aspects is set to grow markedly. Sustainability is arguably now the biggest theme in property investing, and one that will play out over decades.

Time for hands-on property investing

One final point that should not be underestimated is that the days of “laissez-faire”, rent-taking property investment are numbered. Real estate ownership has become a much more interactive and hands-on affair in recent years, and this trend has been accelerated by the pandemic.

It’s now essential for landlords and investors to work closely with their tenants and customers to understand their needs and preferences, how their businesses work and what kind of lease arrangements will work best for both parties.

The pandemic has transferred power to customers and occupiers, who now have flexibility about how, when and where they live, work and play. Landlords will need to respect their choices and respond to them.

[1] The Stanford marshmallow experiment (1972) found that children who were able to delay gratification tended to have better life outcomes. The results of the study have been challenged by subsequent research, but it still makes a great headline

[2] “Delay to Freedom Day Reshapes Recovery Path”, Oxford Economics UK Research Briefing, 14th June 2021

[3] Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester

Important Information

Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at 

The LF Canlife UK Property ACS is an Authorised Contractual Scheme and is suitable for institutional and professional investors. The fund invests in assets that may at times be hard to sell. This means that there may be occasions when you experience a delay or receive less than you might otherwise expect when selling your investment. For more information on risks see the prospectus and key investor information document.

Requests for redemptions of units are subject to a notice period of up to 185 days. In normal market conditions this notice period is waived at the discretion of the manager and units can be sold without giving notice.  The value of property is generally a matter of a valuer’s opinion rather than fact. Costs of buying and selling real property are generally much higher than for other types of assets. Property investments may be subject to significantly wider price spreads than bonds and equities which could affect the valuation of the fund by up to 8.00 %.

Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.


CLI01910 Expiry on 07/07/2022