2021 outlook: Five equity market trends for lenders to watch

Real estate market participants expect more investment in alternative property types, repurposing to become more prevalent and sustainability to be prioritised in 2021.

Despite the severe impact of the covid-19 pandemic on economic activity, some in the European commercial real estate industry believe their sector is well positioned for a recovery in 2021.

Among the end-of-year outlook reports published by equity market specialists are predictions of a rebound in investment activity next year, after 2020’s subdued performance.

According to consultancy CBRE, if the vaccine rollout remains on target, European investment volumes could be up 5-10 percent from 2020. The firm predicts European investment volumes will reach €255 billion in 2020, €276.7 billion in 2021 and expects annual volumes to return to pre-pandemic levels in 2022.

However, many expect the recovery to be uneven, with the pandemic having a greater impact on certain sectors and geographies. For example, some believe investor appetite for traditional office and retail stock will shrink, as investors pivot towards alternative sectors.

Here are five projected equity market trends, informed by the predictions of several organisations, for lenders to consider.

Beds and sheds will remain most popular

Appetite for multifamily residential and logistics property is expected to remain strong in 2021. Multifamily has displayed robust levels of occupancy and rent collection compared to other sectors during the pandemic, likely leading to higher investment levels next year, according to CBRE. Meanwhile, the investment case for logistics has been bolstered by the increase in online retailing, driven by the pandemic. Market watchers expect a continuation of that trend, resulting in more demand for logistics space in 2021.

The appeal of alternative sectors will grow

Investors are increasingly looking to deploy capital in alternative real estate sectors which benefit from long-term trends, including demographic and technological trends. Life sciences, healthcare and data centres, which have all become more relevant due to the pandemic, are among the sectors expected to be of greater appeal to investors in 2021. Huge investment in the search for a covid-19 vaccine has boosted the life sciences sector this year. Meanwhile, demand for data storage has been exacerbated by the widespread adoption of remote working.

There will be further pain for hospitality and retail

Some market specialists predict a K-shaped recovery in real estate, in which some assets will thrive while others become obsolete. In its 2021 forecasts report, investment manager Nuveen Real Estate warned of a likely plummet in values and rents within the hospitality and retail sectors. CBRE noted that discounts are already being sought on retail assets but argued there will be continued demand for exceptional shopping properties in the best locations. It added that the recalibration of retail rents and property values will create opportunities for the repositioning and repurposing of retail assets.

Repurposing will be a big theme

The covid-19 crisis has exacerbated longstanding problems for physical retail and placed further emphasis on owners to reconsider the future use of outdated space. Many in the industry expect repurposing to become a big theme next year, as investors seek to create a new purpose for underutilised space and “future proof” their assets. The most common trend identified by several organisations is the conversion of obsolete shopping space into uses such as residential, flexible offices or industrial space.

ESG will get even more focus

The pandemic, and with it the prospect of change across the commercial property sector, has intensified the discussion about sustainability in the industry. It has forced many to reconsider the link between the environment, society, good governance and profit, as well as the role the industry should be playing in rebuilding more sustainable economies. Nuveen expects real estate assets to play more of a role in impact portfolios. It also predicted that responsible investing will no longer be considered an additional, complementary strategy, but will be integrated within traditional investment analysis and management.