A seesaw of sentiment in H1 2023 will give way to greater investor confidence in H2 2023 as the inflationary storm passes, monetary policy pivots to neutral and the economy proves resilient, notes Colliers in its 2023 forecasts.
The real estate firm predicts that around £60 billion will be invested into commercial property in 2023 as the second half of the year proves to be more stable following a short sharp pricing correction. A fall in inflation will occur by Q2 and the Bank Rate will peak at 4 per cent or less in 2023.
Walter Boettcher, head of Research & Economics at Colliers, comments: “Looking to 2023 as a whole, a material increase in transactional activity will take place in the second half as prime pricing stabilises. However, recalibrating prices for sub-prime non-ESG compliant assets will take longer as refinancing needs clash with higher debt costs and tighter banking requirements.
“Inflation will fall rapidly from Q2 2023 when technical year-on-year statistical base effects begin to drive the CPI figure lower. Falling inflation will be accompanied by a recovery in investor confidence as Bank Rate expectations and debt costs moderate substantially.”
In the debt markets, Colliers predicts appetite for lending will grow but there will be a continued flight to quality and ever greater scrutiny of income streams to service higher debt costs.
Laurence Richardson, director in the Debt Advisory team, added: “Asset pricing is shifting quickly to reflect higher funding costs, but we expect anchored-mindsets, quality product shortages and weight of capital to limit this adjustment. Alternative lenders will secure attractive risk-adjusted deals by virtue of their more flexible underwriting processes and risk analysis compared to traditional providers of finance.”
In the UK regions, rents for Grade A office space in key major cities are expected to grow in 2023 as steady demand for prime space continues. However, when looking at the office market as a whole, Colliers expects average rents to fall as a result of falling number of employees due to the recession. The firm also expects to see the flex sector continue to grow next year, in response to steady demand from both SME and corporate occupiers.
In London, those bringing to market value-add opportunities will benefit from good levels of buyer interest. Limited rental stock availability, particularly for best in class, means that prime and good quality secondary rents will remain robust in 2023 and beyond creating a further rationale for future investment performance.
Simon Glenn, head of London Capital Markets at Colliers, adds: “As with other prime markets, pricing has been discounted substantially already, but this, combined with London’s strong fundamentals, means that a large group of equity rich domestic and international investors will react quickly when interesting properties become available to buy.”