The Investment Climate in the UK Despite forecasts of an impending recession and potential debt refinancing challenges, the United Kingdom is predicted to stand out among 20 countries evaluated for its real estate investment prospects in 2023. This analysis, based on a comprehensive annual outlook, indicates that the UK might indeed prove to be a lucrative destination for real estate investors, regardless of the current economic conditions.
Targeted Investments for Maximum Returns It is suggested that logistics spaces and premium shopping centres are expected to deliver the highest returns between 2023 and 2027. On the other hand, residential properties and logistics appear to be the most robust sectors for rental growth. This information helps investors identify the right avenues to diversify their portfolio and ensures maximized returns.
Economic Outlook and Market Predictions According to an economic forecast, inflation, which has been a significant concern across the evaluated countries, is believed to have peaked and is predicted to descend below the 2% target set by central banks. This decline is anticipated to occur by early 2024, as a result of monetary tightening measures and rate hikes implemented by these banks.
Although the employment scenario remains favorable and the bounce-back from the COVID lockdowns has been managed successfully, the forecast predicts a rise in bond yields. It also expects a brief yet significant recession during the last quarter of 2022 extending into most of 2023.
Market Transactions and Investment Volumes The full-year transaction volumes in the European real estate market for 2022 are estimated to reach €260bn (£223bn), with €218bn invested in the first three quarters. These figures follow the record €350bn of 2021 and demonstrate the effects of increased borrowing costs over the last ten months on investors using leverage.
An Opportunity amidst Challenges This research estimates a potential debt funding gap of €24bn over the next three years in the UK, France, and Germany. This gap is anticipated due to issues related to the refinancing of mature loans, caused by a decrease in capital values and reduced risk appetite among lenders leading to lower loan-to-value ratios. However, this presents a unique opportunity for equity and debt investors with capital ready to be deployed. As the old adage goes, “in every crisis, there’s an opportunity”. So, for well-prepared investors, this could be an exciting time to gain an advantage in the real estate market.
Relative Value Analysis and Investment Prospects Out of 168 market segments covered in a comprehensive relative value analysis, only five markets are deemed attractive for investment, with 47 classified as neutral. This implies that investors can anticipate achieving their required rate of return in approximately 30% of these markets. Remarkably, the United Kingdom has been recognized as the most attractive market for the second consecutive year. The attractiveness of the UK is based on a relative value basis for the next half-decade. Following closely behind is the Benelux region, boasting an above-average percentage of appealing and neutral markets.
Forecasted Returns and Market Dynamics Predicted returns for all property types across Europe for the period of 2023-27 remain optimistic. However, yield expansion has nudged forecasted returns down to 4% per annum across all market segments, a decrease from the 4.7% predicted half a year ago. This trend is primarily due to higher government bond yields elevating property yields and constraining capital value growth. Key Highlights
Here are some additional insights: • Over the forthcoming five-year period, the logistics industry is projected to yield the most substantial returns among all sectors, with an average annual return rate of 5.4%. Solid rental growth is expected to balance out yield widening.
• Prime shopping centers rank second, with returns of 5.1% per annum due to high current yields. Shopping centers are predicted to be the leading income-producing sector over the next five years, with base case income return projections remaining fairly steady.
• All sectors are expected to experience negative capital returns for the next three years, with an overall capital value decrease of -12% in the base case scenario. This decline is less severe than the -20% cumulative loss witnessed during the global financial crisis in 2008-9.
• The residential and logistics sectors are forecasted to be the most resilient for rental growth. Higher debt financing costs, rising construction costs, and environmental, social, and governance (ESG) regulations across all asset classes may further limit supply, protecting most sectors from the recession’s impact on space demand.
• The impact on office demand due to the increased work-from-home trend post-COVID has been less significant than expected. The forecast for office employment growth from 2022 to 2026, after necessary adjustments, indicates significant enhancements in cities such as London, Amsterdam, and The Hague.
• Five segments remain attractive based on a relative value analysis: light industrial in Paris, logistics in Berlin and Zurich, and shopping centers in Stockholm and London.
Economic Conditions and Investment Outlook Despite the challenging economic conditions marked by record inflation levels and higher borrowing costs, the report suggests that viable opportunities remain for well-positioned investors. As the last few years have demonstrated, macroeconomic conditions can change rapidly, and investors should be prepared for volatility. Furthermore, rising debt financing and construction costs, which are limiting supply across the real estate market, are expected to buffer the negative impact on demand from broader economic headwinds. One of the only countries in the world with robust real estate market in this time is Singapore. It has outperformed when the rest of the major cities see decline. Chuan residences is an upcoming luxury residential property with good potential upside to be launched.