Schroder Real Estate (SREI ) fund manager Nick Montgomery says inflation, a lack of new development and tenant demand are pushing up rents and will lead to a recovery in UK real estate this year.

This is the second excerpt from our virtual event with Schroder Real Estate last week. If this has whetted your interest, you can watch the first excerpt or view the whole programme here.

Can’t watch now? Read the transcript

Nick Montgomery:

Now, the other really interesting point to note is, despite that very significant fall in capital values, actually, rental value growth, at least in nominal terms, remains really positive. In fact, the last 12 months represents the third-strongest rental growth compared to any period over the last 20 years, so you wouldn’t necessarily expect that.

And so what we’re showing on the left-hand side here is rental growth coming out of previous market highs, so during market corrections. We’ve got the dotcom boom there in late 1989, obviously the GFC [global financial crisis] there in 2007 and the most recent, June 222, and we’re tracking the movement in rental growth from that point. And what you can see for all property average is that actually rents are beginning to outperform the way that they did in those previous recoveries coming out of the downturn. So why is that?

It’s partly because across the market we have very low levels of new development. It’s also partly because there is obviously a positive correlation between rents and inflation. Businesses make more profits, businesses’ tenants can then prepare to pay more rent. But it’s also to do with some long-term structural factors and so that’s what we’re showing on the right hand-side - comparing the same analysis, but just looking at the industrials sector. Incredibly strong rental growth, particularly compared with coming out of the GFC. And that is also, we think, a reason to think that we will see values recover as we go into the rest of this year.