Global Markets - The House View

Brought to you by our industry-leading experts, The House View provides a high-level summary of our latest thinking on the key issues driving global property markets.

In the most recent update to The House View, we re-examine the inflation debate that continues to apply pressure to markets, explore capital flows with the return of international buyers and keep a cautious eye on the emerging Omicron variant.

Global economics

Recovery is V shaped but with a Nike swoosh tail. Inflation will subside from mid-2022 with supply chain pressures easing. Interest rates will rise in 2022 but not as quick as markets anticipate.

In the best case scenario imagined (see article from March 2020) the recovery has predominantly been “V shaped” with global GDP exceeding pre-crisis levels in mid-2021. However, the “V” has the Nike swoosh tail with momentum waning and threats of new variants, such as Omicron, which if more severe or vaccine resistant would prolong and dent that tail.

There are opposing forces as to how long the tail will be across economies. On one hand we have renewed lockdowns, particularly for unvaccinated people, across Europe and stringent social and travel measures in place, particularly in Asia and increasingly being reintroduced across more of the globe, which will prolong the swoosh.

On the other hand, travel had begun opening up with visitors entering the US and Singapore for the first time since early 2020 – Australia has paused borders until more is known about Omicron. The pandemic continues to create upheaval but for many nations the ‘new normal’ is veering towards living with Covid-19 and for those, the tail will be shorter.

The elephant in the room here is the global supply chain frictions and shortages. The good news is they are expected to peak this quarter and end in the latter half of 2022. Evidence of this can be found in inventories building up, shipping costs having fallen back from their peak and the number of ships waiting at ports starting to drop. This adds water to the inflation debate and that it is transitory. We expect to see the current highs, of over 6% in the US and 4% in UK and euro zone, fall back towards target in the latter half of 2022. Large US retailers, such as Walmart and Target, add to this by not passing prices on to consumers.

Interest rates will rise globally in 2022 but not as far as markets fear. New Zealand and Norway and The Bank of England have already acted. The Federal Reserve will continue unwinding Quantitative Easing and will raise in the latter months of this year. Property investors are unlikely to get spooked and may look to capitalise on the record low cost of borrowing underpinning demand in markets.

Global residential

Housing markets have more room to run, but we are not in a bubble. Travel bans will impinge on cross-border transactions well into 2022.

National and city-based house price indices are surging, yet this is a story largely confined to advanced economies where support measures have protected jobs and enabled significant savings. The scale of demand, driven by a reassessment of living conditions, looks set to continue based on the results of our recent Global Buyer Survey that found 64% of homeowners expect the value of their primary residence to increase in the next 12 months. Almost a fifth of respondents said they had moved house since the start of the pandemic and of those yet to move, 20% are considering relocating in the next 12 months.

Unlike in 2008, banks now operate under tighter lending rules, households are less indebted, there is not expected to be a sudden jump in unemployment or interest rates, and governments are taking a much more interventionist stance to deter speculative activity. But, perhaps most critical is the extent to which several key markets continue to suffer from a severe undersupply of housing.

The Delta variant along with a mixed vaccine rollout programme means it will be 2022 before we see any significant international travel. Uncertainty surrounding restrictions and the removal of the US from the EU’s ‘safelist’ at the end of August not only make it challenging to undertake viewings and agree sales overseas, but point to the stop/start nature that lies ahead for global buyers. As vaccine passports gain traction, countries with advanced vaccine programmes, like the US, UK, Canada and the UAE, will emerge as influential drivers of prime markets in the second half of 2021.

Global capital markets

Record cross-border capital forecast for 2022, flight numbers taking off and US-led investor demand.

Global capital flows over the first three quarters of 2021 (Q1-Q3) have been the strongest in over a decade as domestic and cross-border investment activity re-ignites. Cross-border activity specifically over the period is up 30% on the first three quarters of last year and 8% above the long term Q1-Q3 average, according to Real Capital Analytics data. The physical crossing of borders is supporting the growth in activity, with the cautious re-opening of global travel causing flight numbers to hit 2019 levels for this time of year.

Inflation remains a key concern for investors. Some fear that persistent price rises could lead to higher interest rates and a possible negative impact on asset values. In fact, real estate often acts as a useful inflation hedge. However, as we believe that price pressures will ease towards the end of the year, any enthusiasm central banks may have had for significant monetary tightening will be dampened.

Looking to 2022 we expect this trend to accelerate further. Our Active Capital capital gravity model forecasts record cross-border capital flows next year, as the world moves to the next phase of living with Covid-19. You may wonder where all this capital is moving; the top destinations of capital are expected to include the US, UK, Germany, France and the Netherlands. The office sector could contribute to just over half of all cross-border investment, while Residential (15%), Industrial and Retail (both 13%) assets are also forecast to be a priority for international investors.

The US is expected to lead investor demand with US Private Equity, US Investment Managers and US Institutions forecast to be the top three investors in 2022.

Global office market

Twice bitten, thrice shy: the cautious return to the office is back on, the phoney office space war is over and the narrowing window of opportunity will lift activity levels.

As summer ends in the northern hemisphere, ‘back to the office’ has joined the traditional refrain of ‘back to school’. Early evidence from transport and building usage data does suggest a response. Yet caution prevails given the staccato progress towards re-occupancy evident over the past 18 months. Ten of our 15 global gateway markets still report office occupancy below half of typical levels, whilst tech titans Google and Apple have delayed their return to the office until early 2022. Momentum is indeed building but there is still considerable road to run.

It is unlikely that the current road brings a return to pre-pandemic levels of occupancy. Our re-entry into the office will instead be more fluid and flexible, reflecting a real shift in working styles. More than one third of the 1,300 Global CEOs recently surveyed by KPMG has already implemented hybrid work styles, combining remote and office-based working. This is not bad news for offices. Only one-fifth of those same CEOs are planning to reduce their physical footprint, compared with almost 70% who planned to do so a year ago. Many of the claims of drastic space reduction that appeared early in the pandemic now appear well wide of the mark.

The increasing pro-office tone among business leaders, and the window of opportunity presented by global office markets, will bring renewed momentum to market activity. More than 70% of the 90 markets covered in our Global Occupier Dashboard are presently occupier favourable, but many become more challenging – especially for those seeking premium quality offices – from 2022 onwards. We fully expect occupiers to move rapidly from analysis to action against this backdrop.

UK economics

Investors should hold their nerve as rates will start to rise, albeit gradually, in early 2022. Growth to slow and be investment led. UK to lead charge in future of buildings and measuring emissions.

The good news is the end of the furlough scheme, as expected, didn’t cause ripples, with unemployment falling to 4.3% in October. The less good news is that inflation rose to 4.2%, higher than expected. This was part of the reason behind The Bank of England’s (BOE) decision to raise rates to 0.25% in December. The Bank has signalled to the market that they will act when necessary and should restore faith. It is likely the BoE’s base rate will be 1% by the end of 2022.

The even less good news is that the UK’s economy will face hurdles in 2022. Global supply chain disruption and new variants aside, Brexit tensions are flaring, and households’ wallets will be squeezed with higher energy costs, rising interest rates and higher taxes. However, there will be growth in 2022 and consumer spending is estimated to grow by 6.4% in the latest consensus. It will also be led by investment, particularly with tax incentives, provided Brexit doesn’t derail confidence. 

As the host of COP26 the UK will look to capitalise on momentum and lead policy. New projections from the UN state that the globe is on course to heat up 2.7C from pre-industrial levels by 2100, demonstrating the urgency for action. We will see greater emphasis and more funding towards sustainable initiatives. In the UK the Whole Life Carbon Roadmap launched by the UK Green Buildings Council could spell the future direction for property. This includes the shift to retrofitting rather than rebuilding and introduction of legal measurement and minimum standards for both operational and embodied carbon.

UK residential

The impending rate rise, inflationary pressures, and the return of international buyers.

It is still easier to find a buyer than somewhere to buy in the UK residential market.

In a similar way to other parts of the economy, supply shortages are the main story as the year draws to a close.

In the case of microchips and building materials, disruptions will correct themselves progressively. The housing market is more seasonal and so attention has turned to next spring in an attempt to guess what will happen in 2022.

It’s a question that has been made more complicated in recent days by the emergence of the Omicron variant of Covid-19 but we should get some more clarity on its potential impact this side of Christmas.

In the meantime, more owners are certainly positioning themselves now to act next year.

As supply normalises, it is a reasonable assumption that fewer parts of the country will be experiencing gravity-defying double-digit house price growth this time next year. The other factor that will exert downwards pressure on prices is a rate rise, which may not happen until 2022 due to uncertainty surrounding the Omicron variant.

It would be wrong to overstate the short-term impact, though. Rates were 0.75% before Covid-19 struck and any effect on prices is likely to be limited while rates remain below this level. What’s different between now and early 2020 is the presence of inflationary pressures, which may cause demand to start fraying around the edges depending on how elastic the definition of “transitory” becomes in relation to the cost-of-living squeeze.

The return of international buyers feels almost as certain as a base rate increase.

With the prospect of further lockdowns tentatively fading in the UK, apartments are back on the radar of buyers in central London, just not all apartments.

Flats with outdoor space, an allocated area to work from home and facilities including gyms and meeting rooms are now in demand. Meanwhile, some buyers are being deterred from taking on properties that require building work because of construction supply chain disruptions and spiralling costs.

For anyone wondering how much a prime central London property is worth, it is a patchwork picture that increasingly depends on neighbourhood, property type, amenities and state of repair.

Meanwhile, the dramatic bounce back continues in the lettings market in London and the Home Counties.

The flood of short-let properties onto the long-let market has dried up as lockdown restrictions have eased. At the same time, a number of owners attempted to sell during the stamp duty holiday, further driving down supply. Meanwhile demand has surged, triggered by the re-opening of universities and offices.

As a result, average quarterly rental value growth in prime central London was 4.2% in the three months to October. It is the highest figure since March 2011, a time when the rental market was shaking off the effects of the global financial crisis (GFC).

In prime outer London, average rental value growth was 3.8% in October, the highest figure since September 2007, just before the GFC struck.

UK residential investment

Investors will continue to back residential, applying downward pressure on yields

Demand for income-producing property showed little signs of cooling in the first half of 2021 as investors continue to shift their focus towards operational-type assets.

We’ve explored how the student, multifamily and seniors housing markets have been key beneficiaries of this trend – largely buoyed by their resilience against what has been an uncertain and changeable backdrop. Just shy of £5bn was committed in total across H1. Strong showings in the build-to-rent and seniors housing markets in particular mean we expect both will report record years in 2021.

We expect this combination of strong investor demand and positive sentiment around the performance of residential investments will combine to put downward pressure on yields, something we highlighted in our recent Q2 Yield Guide.

UK capital markets

Logistics propels positive growth, UK still a top destination for cross-border capital and the US supporting the UK office.

The first three quarters of 2021 saw a recovery of UK investment, with Q1-Q3 volumes 36% above 2020 and 15% above 2019. While most sectors have seen positive growth, UK logistics has propelled ahead with Q1-Q3 2021 volumes already exceeding full year volumes for both 2020 and 2019. The UK benefitted from being seen as a global gateway and safe haven for capital as well as seeing an increase in near neighbour investment from within Europe by investors who were less impacted by travel restrictions.

We expect this recovery to accelerate in 2022, spurred by further recovery of cross-border capital. According to our Active Capital research, the UK is expected to keep its place as the second largest global destination for capital in 2022, after the US. Demand is expected to be broad based, with investor interest from right across the risk spectrum albeit seeing North America as a significant deployer of capital.

A combination of US private equity and investment management interest is forecast to support the UK office sector being the top global destination for capital in 2022. Meanwhile the UK takes silver in second place for logistics investment and bronze as a global destination for the residential and retail sectors.

UK retail

Consumer bounce back will extend to the Christmas period and beyond, expect a Q4 flood of retail investment stock and beware of 2022 occupational ticking time bomb

Ignore everything the media has to say about retail sales in the coming months and over the all-important Christmas period. We forecast that retail sales will grow by around 5 to 6% year on year in Q4 2021. This will be significantly below the artificially elevated growth immediately post lockdown (Q2 +21.3%), but decelerating growth will still be good growth. The UK consumer is in good health and continues to spend freely.

Expect a sharp reversal of year to date transaction volumes, with many bank-led shopping centre sales coming forward towards the end of the year. A previously subdued market will quickly become swamped and we fear supply could overwhelm demand in some areas of the in-town market and pricing could be impacted. The window of opportunity of counter-cyclical buying opportunities could potentially slam shut before many investors even become aware of it existing.

The elephant in the room, trumpeting away in the long grass where the UK government has unceremoniously kicked it – rent arrears to the tune of £6.4bn accumulated during the pandemic. The moratorium on forfeiture has thus far prevented landlords from proactively taking action to recover monies owed, but this will be lifted in March 2022. Retailers need to work with landlords towards compromise solutions (for example staggered re-payments, lease re-gears) to avert a potential occupier blood bath. And put negotiations and contingency plans in motion now, rather than wait until March.

UK logistics

Added demand-side pressures, rising rents, and rising build costs will continue to cause construction delays.

The fundamental market drivers remain unchanged from last year. E-commerce and home delivery demand continues to drive demand for space. However, the UK government is prioritising growth and investment in advanced manufacturing as a key component to its levelling-up agenda as well as the road to net zero. We expect manufacturing and alternative uses to become increasingly important in fuelling further growth in the occupier market.

We anticipate robust levels of rental growth. Demand for space continues, while supply-side constraints limit delivery of new stock. Occupiers are having to agree to longer lease lengths in order to secure space and rent-free incentives have decreased due to competition. Competition is particularly fierce for the largest units, with very limited options available.

Delays on building materials and inflated build costs will continue to impact development schedules over the next year. Expected completions dates are being pushed forward into next year, construction starts postponed or schemes put on hold. Delivery times for construction materials have increased sharply as supply chains struggle to keep pace with demand. Developers are having to reconsider their construction programmes to account for longer lead times for materials.

UK office market

Three consecutive quarters of rising take-up and a future under-supply of new buildings.

Last quarter we saw enquiries and viewings bounce-back to pre-pandemic levels, but occupiers remain cautious about signing new leases, so the recovery in take-up continues to be a soft one and 40% below long-term average levels.

We expect this momentum to build into next year as occupiers revisit their space occupation requirements in what should be a strong economic climate. We’re already seeing this reflected in rising levels of active requirements in London which at 8.4m sq. ft is only marginally below the long-run average.

The breakdown of that demand demonstrates the much broader occupier base of London not being so dependent on the health of the financial sector. Where there is demand right now, it is directed towards the best-in-class buildings where rental levels achieved have been better than the market average. Accordingly, we’ve raised our average headline prime rents in the core City of London and West End markets back to pre-pandemic levels and have marginally improved our five year forecasts compared with last quarter.

There hasn’t been the same level of landlord or tenant distress in this downturn so the rise in availability has not been like previous cycles. There is some concern with the recent rise in tenant release space but at present the majority is contained in the City and Docklands, represented by a small number of lower quality buildings, and is less than one-third of overall availability.

The likelihood of the market being overwhelmed with too many vacant buildings is also reduced by a constrained development pipeline. Our analysis suggests this will fall short of typical levels of take-up for new and refurbished office space. This occurs at the same time as structural demand for these buildings rises. Occupiers are adjusting their office footprints in a post-pandemic world to meet with better employee wellness and sustainability requirements.

Courtesy: Knight Frank

Global Property Markets

Notes to Editors

Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank has more than 20,000 people operating from 488 offices across 57 territories. The Group advises clients ranging from individual owners and buyers to major developers, investors and corporate tenants. For further information about the Company, please visit

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