2021: A year of curve balls
The past 12 months have thrown us some curveballs. The twists and turns of the pandemic and indeed non-Covid related ‘trends’ have also made their presence felt and many can be considered permanent. for example, the pandemic broke the ice on video conferencing tools like Zoom taking them mainstream and now they are here to stay. Here are some other interesting trends. What does this “new normal” look like?
1. FINANCIAL MARKETS
Argo Blockchain became the first crypto-mining service provider to gain admission to the main market of the London Stock Exchange. It was also one of the years top five most traded stocks, along with aircraft engine company Rolls-Royce, British Airways owner International Consolidated Airlines, BP and Lloyds Banking Group. These top five most actively traded stocks can be considered a proxy/indicator for financial markets given they tend to look 6 months ahead.
2. BUSINESSES THAT PROSPER DURING A PANDEMIC – IN WITH THE NEW
Towards the last few weeks of the year, there has was a flurry of activity and a big shift in the stocks being most actively traded, knocking Argo, BP and Lloyds out of the top five for December to date. They include online fast-fashion retailer Boohoo Group (BOO) and Genedrive (GDR), a Covid-19 test-maker. Genedrive’s appearance shows that two years into the pandemic, Covid still retains the power to unsettle and influence financial markets and the global economy as the Omicron variant advanced to replace Delta as the dominant strain. Personal protective equipment, such as masks, gloves and Plexiglas, will remain in vogue, although demand will slow in 2022. Some people will also continue to wear masks and gloves in public because they can prevent the spread of other diseases, such as the common cold and flu. The dis-continued presence of Lloyds, a bank with a large mortgage book, in December suggests the market believes the range of possible outcomes for interest rates has been decreased by the Omicron variant.
3. ONLINE SHOPPING, HOME DELIVERY, AND DISTRIBUTED WAREHOUSES
The new normal has seen entire industries struggle to survive – the travel industry, the live event industry and a whole host of other sectors have seen a significant downturn – Amazon on the other hand has flourished and now accounts for more than $2 out of every $5 spent online in 2021. Growth in the UK over the next few years will be driven by digital marketplace giants with Amazon set to overtake Tesco as the UK’s largest retailer within the next 3-4 years at its current growth rate. A third of all UK retail sales are expected to occur online by 2025, up from 26% in 2020 (and just 2% in 2006), outperforming all physical channels by a stretch. Online shopping and home delivery models offer convenience, especially when people are working from home and this will drive demand for distributed warehouses.
4. PROPERTY MARKETS
Commercial property
For commercial property, 2021 promised the return of improved trading conditions, in stark contrast to the environment that laid waste to the retail property giant Intu in June 2020. Rents have been a major issue since the first lockdown.
Quite how far the demand for commercial property has been changed forever remains a hot topic for debate. The demand for human interactions in workplaces, retail and leisure activities will presumably bounce back once restrictions ease. On the other hand, advances in technology have made further shifts to online shopping and home working possible and technological change has a habit of being hard to reverse.
While considerably down on last year, the income available from commercial real estate investments remains competitive versus the income available from government and corporate bonds. Rent deferrals as opposed to cancellations during lockdown suggest some landlords could benefit from additional revenues as the economy slowly reopens.
With the prospect that rents will firm up as the pressures on tenants ease in a post-Covid world, commercial property remains an attractive option and a way of achieving a more diverse investment income. However major change lies ahead as demand patterns continue to evolve, but that change will undoubtedly bring opportunity.
Demand for office space has undoubtedly dropped as businesses realise that they no longer need their employees to come into the office every day, if at all. This is especially true of “knowledge workers”. Employees now demand the opportunity for remote work, since working from home eliminates the stress of the daily commute and thereby provides more time to spend with family.
Residential property – That’s a no to downsizing
If the pandemic has put a pause on downsizing plans, it only increases a trend that was in place before Covid-19. Pre-pandemic many were already finding that, once they ran the numbers, the reality of downsizing rarely lived up to the dream. Firstly, moving is an expensive business once you factor in the frictional costs and any potential windfall is chipped away at by the cost of preparing the house for sale, stamp duty, estate agency fees and conveyancing – it all adds up.
The downsizing theory is based on selling a bigger house and buying a smaller one – and pocketing the price difference. But that only works if you’re comparing like-with-like.
Despite housing becoming much more expensive over the last few decades, rather than encourage the more efficient use of housing, under-occupancy – i.e. having two or more spare bedrooms – has increased and the existing stock of housing in England is not used particularly efficiently
39% of homes had at least two bedrooms that are not regularly occupied in 1995/6. Over the last 20 years, between 1999-00 and 2019-20, the proportion of owner-occupiers living in under-occupied accommodation increased from 43% to 52%.
– English Housing Survey (2021)
No such increase in under-occupation was observed in the private rented sector, suggesting more efficient use.
5. HORIZON SCANNING – CRYSTAL BALL TIME
Houses are ‘increasingly seen as a store of wealth’, making the market less efficient in allocating housing. This will attract interest from the electorate and therefore the government and opposition politicians.
How might recent changes in Inheritance Tax affect housing occupancy? Should owner-occupied properties be excluded from Capital Gains Tax? Could fiscal and other incentives encourage more homeowners to take in lodgers?
Housing under-utilisation rates in the UK have been exasperated by the pandemic and I expect measures to address the institutional factors that inhibit downsizing. There are also psychological and cultural factors that will be harder to overcome.
After the war, big, old, rambling buildings were expensive to keep as residential property and a lot were turned converted into offices. This could now come full circle, with offices being turned back into luxury residential property.
Remote work does means that some employees will no longer be locked into living in the same city as their employers. Some people will choose to live closer to family or in a better environment. More new build homes will come with a home office (or two) with demand for better connectivity, especially in rural areas.
In 2022 hopefully, uncertainty over COVID-19 will no longer be the foremost economic worry as it becomes endemic. Instead, I think the mounting fallout on the supply chain, inflation, and of course Brexit, will be the biggest threats to economic growth.
