Real estate investment markets are expected to emerge from a period of uncertainty and pricing will likely stabilise towards the end of 2023, with a continued flight to quality and ESG being key drivers of activity across all asset classes, according to the UK Real Estate Market Outlook 2023 published by CBRE.
In the near term, a moderate recession is expected, with high inflation and rising interest rates putting downward pressure on economic activity. Income returns, rather than capital growth, will likely drive commercial real estate returns in 2023 – heightening the importance of asset management and the financial performance of occupiers.
The announcement that Solent Freeport is now confirmed is seen as a significant boost for the South Coast in terms of both investment and employment opportunities. The five existing and proposed designated ‘tax sites’ across the region, will benefit from a package of incentives that include enhanced capital allowances; no stamp duty; five years full relief on business rates and three years employer national insurance relief on annual salaries of up to £25,000.
Head of CBRE Southampton, James Brounger comments: “The recent confirmation of Solent Freeport as one of the first UK Freeports will see private sector investment into the region of £1.35bn. With the forecast of some 15,000 jobs and the construction of substantial state of the art business space, the South Coast will benefit hugely as it looks to become the thriving hub of the UK’s marine and maritime sector.”
On the investment side, CBRE’s Head of UK Research, Jennet Siebrits, anticipates further inbound investment into the UK market. “While we forecast investment volumes will drop somewhat, the UK real estate market benefits from a diverse investor base. The realignment of prices towards the end of 2022 means that 2023 may provide opportunities for private capital to enter the UK market.”
Siebrits added: “We face an undoubtably challenging start to 2023, but the clouds will begin to break later in the year. Logistics and purpose-built student accommodation sectors have robust rental growth prospects and life sciences, build-to-rent and healthcare sectors have strong fundamentals that remain attractive to investors.”
“The performance of the listed sector in 2023 will also be of interest. In 2022, the share prices of UK REITs fell well before the change in the private property market. Investors will therefore be watching for signs in listed property prices that indicate improved confidence in UK real estate. Green shoots of recovery will materialise.”
Overview of sectors:
Sustainability
The implementation of more mandatory disclosure requirements and high energy prices will accelerate sustainability action within the real estate market, from both investors and occupiers. CBRE expects buildings with greater energy efficiency or using onsite renewables to be insulated from the worst of the energy price shock.
Landlords and investors will be better informed as to the cost and benefits of sustainability and green features, as better quality and more substantiated data is cemented into the valuations process. More ‘net zero’ buildings are anticipated to enter the market in 2023 and the increased demand from occupiers will prompt further scrutiny as to what qualifies as a ‘net zero building’.
Office
In the office market, leasing activity will be constrained due to a fall in office-based employment in 2023. CBRE expects continued strong demand for the best quality space and as a result, appetite for properties that are newly developed or refurbished will remain high.
Yields will expand further during the first half of 2023 in most UK office markets. Pricing will stabilise during 2023 and this should stimulate more investment activity. CBRE forecasts office investment volumes to be down 20% year-on-year in 2023, with the majority of transactions likely to take place in the second half of the year.
Logistics
CBRE anticipates occupational activity levels will remain above long-term averages in the logistics sector. Third-party logistics providers are expected to continue leading the take-up due to the ongoing search for flexibility in supply chains.
The market faces challenges including critically low levels of supply, increasing construction costs, rising exit costs and higher exit yields. However, CBRE asserts that logistics assets will remain attractive to investors with continued rental growth expected.
Life Sciences
The life sciences sector continues to grow, in part driven by companies in this sector seeking to de-risk supply chains by capitalising on the nearshoring, onshoring and reshoring trend which countries across Europe are benefitting from. The ‘golden triangle’ locations- – Cambridge, London and Oxford remain a particular focus, with a majority of funding allocated to these areas. However, this is broadening into other regional locations and with Government ambitions to make the UK a “Science Superpower” by 2030, the sector is likely to benefit from continued research and development funding as part of a package to deliver this.
