ALEX BRUMMER: The real estate sector is recovering as demand and rents are reactivated

The Labour government faces big tests if it is to boost growth by removing planning restrictions and setting housing targets. Fortune is on its side. The fall and long pause in house values ​​and rental yields, caused by the pandemic and working from home, are unravelling.

Interest rates are falling, making borrowing more affordable. Risk-averse listed property companies are becoming more adventurous, especially in the “golden triangle” of London, Oxford and Cambridge.

It is less clear whether big property developers can be persuaded that the time is right to start building in regional cities. Rental yields outside the City and West End, which are recovering, are much lower. Demand for large campuses, such as those seen in Paddington and King’s Cross, is not as quantifiable.

At a micro level, the difficulties can be dire. When I was on holiday in the Tamar Estuary in Cornwall this summer, the parish reports were not encouraging.

An application for planning permission for a couple of dozen houses was refused.

The reasons given were the weaknesses of the cliff road that would provide access and the shortage of GP services and water.

Setting targets is easy enough, but unless developers can be persuaded to include infrastructure in their cost calculations, removing planning rules will not work.

That doesn’t mean commercial developers lack ambition. In central London, the grand dame of listed British property companies, Land Securities, is close to completing its compelling redevelopment of Victoria.

West End office rental yields are up 11 per cent from the Covid-19 low point in 2021 and the outlook looks good.

Rival British Land (BL), which has bet heavily on the City through its Broadgate project and the Citadel project, a nearby hedge fund, is optimistic. Broadgate is being redeveloped and modernised and is as much a leisure centre as it is an office complex. Rents are up 5% and the sharp fall in values ​​(31% from the low to the high) is being corrected.

There is optimism about retail parks, and not just those in London. City centres may be in trouble and that will be a problem for housing tsar Angela Rayner.

However, as the economy recovered in the first half of this year, footfall and footfall at retail parks boomed. High Street favourites, notably Marks & Spencer, have seen their turnover increase many-fold. Next is doing well and newer players such as B&M and Aldi are continuing to make their mark. Now that the pandemic and cost of living shocks are fading, big property firms are becoming less risk-averse.

BL has brought in a former airport near Cambridge, where it intends to build a mixed-use science and innovation hub. The difficulty for the Government is that doubling down on the Golden Triangle will only boost productivity in an area that is among the fastest growing in Europe. Replicating that success is difficult. The Elizabeth Line demonstrated how infrastructure drives development.

HS2 is attracting investment to Birmingham, but efforts to mobilise private developers to invest in and around Euston in preparation for the London terminus of HS2 are proving difficult. One developer described it as a big hole in the ground leading nowhere.

Since World War II, few investments have performed as well as commercial real estate. The pandemic broke a long streak of rising stocks and prompted spending cuts. Managers locked up real estate funds. The latest S&P Purchase survey shows construction is recovering as demand and rents recover.