The economic outlook, political uncertainty and difficulties recruiting skilled staff are the biggest areas of long-term concern for the UK's real estate leaders heading into 2023, while life sciences, student accommodation, build-to-rent and opportunities in Birmingham and the Midlands are among the bright spots.
That is according to a new industry survey by the British Property Federation that provides wide-ranging insights into how UK real estate's senior decision-makers are feeling about the sector.
The survey of BPF members, which was conducted by Ipsos Mori in partnership with Grosvenor, polled 105 board-level executives of UK property developers, owners, funders, agents and advisers, from 15 December 2022 to 10 January 2023.
It finds real estate leaders feeling gloomy about the UK's economic outlook and in turn the sector's prospects in 2023, but more than three-quarters are confident the sector will perform strongly over the next five years.
Underlying that positive sentiment around the long-term prospects of real estate is attitudes to values, which have sharply corrected in the last six months.
While 25% of respondents expect their portfolio value to be a little lower in 12 months' time, and 6% expect it to be much lower, a majority expect it to either be the same (19%), a little higher (20%), or much higher (6%).
David Marks, chief executive officer and co-founder of Brockton, speaking at a briefing for the research, said the valuation falls and repricing in the market last year mainly fed through in the fourth quarter and were a response to rate rises and a lack of debt. But he said the increased number of alternative lenders in the market compared with the great financial crisis meant the market was much better insulated.
Polly Troughton, managing director, logistics, St Modwen, said: "The point is you cannot be short-term about things in real estate and the underlying occupier trends for the sector are strong. But what occupiers are saying is it must be modern space now and it must be energy efficient."
The results show that the property sector expects 2023 to be a challenging year, with only 10% positive on the short-term outlook for the UK economy. Over half identify economic uncertainty (57%) and inflation and the increase in build costs (56%) as one of the biggest strategic risks for 2023, while 41% highlight the cost of debt and just over a fifth (21%) cite the planning system.
The industry is more positive on the longer term outlook, with 77% confident in the performance of UK real estate over the next five-year cycle. Over this period, the industry’s "skills gap" (identified by 29%) and climate change (28%), were identified as key strategic risks, behind economic and political uncertainty.
Despite a challenging outlook for 2023, almost half of leaders surveyed (49%) plan to accelerate the delivery of their net-zero programmes over the next twelve months, with another 28% expecting to maintain investment at its current level. Just 2% expect to scale back delivery.
The survey responses suggest access to talent could be an obstacle to achieving net zero. Overall, 77% are finding it difficult to attract and retain talent, with environmental sustainability identified most frequently (by 26%) as an area where it is difficult to recruit people with the requisite skills.
London remains the pre-eminent property investment destination for leaders, with 40% expecting to increase development in the capital over the coming year. However, the Midland, and other key regions, are also likely to receive increases in investment. Positive views around the construction of the High Speed 2 rail line in cities like Birmingham, may account for the 28% expected increase in development in the Midlands, Ipsos Mori chief executive Kelly Beaver said. The North of England and Yorkshire are also expected to get a 19% uplift.
Nearly six in 10 (57%) said that an improved economic outlook would make them more likely to increase development activity in 2023, while almost half (49%) highlighted that a reduction in inflation would have the same impact. Other common catalysts for development activity included increased availability or cost of debt (34%), greater certainty of demand (27%), and a more efficient planning regime (22%).
The survey results suggest a split between emerging "alternative" sectors and "traditional" real estate asset class performance over the next twelve months.
When asked to identify which asset classes (up to three) would outperform in 2023, almost half (47%) identified life sciences, 42% selected student accommodation, with 41% opting for build-to-rent. Despite recent volatility in pricing, 28% selected logistics to outperform in 2023 with the sector supported by record low vacancy levels and strong underlying demand.
Respondents were less confident in the short-term performance of traditional workspace. Here 10% expected co-working and flexible office space to perform well, 8% said the same for London offices and just 2% were positive about regional offices. Other sectors that were not in favour include hotels (7%), town and city centre retail (5%) as well as out-of-town (4%), with residential for sale and leisure both on 3%.
The shift toward emerging asset classes is also reflected in property companies’ top three longer-term investment plans. Over the next five years, 41% of respondents plan to increase investment into build-to-rent, 31% are targeting logistics and 30% are planning to upscale in life sciences.
Melanie Leech, chief executive, British Property Federation, said in a statement that while the industry is braced for 2023 to be a challenging year, those surveyed clearly believe that there is a positive outlook for the sector in the next five years. That, she said, reflects the cyclical nature of real estate and the property sector’s role as long-term investors in towns and cities.
“The sector is currently facing a perfect storm of pressures including cost inflation, skills shortages, and increased cost of debt but as economic conditions improve we should see activity rebound strongly. Crucially, the industry is set to double down on its carbon commitments which is vital if the UK is to achieve its net zero target.
“Political and economic uncertainty however remain the two most significant risks for survey respondents over the medium term and the government must not take the ingenuity and commitment of the property sector for granted. After the political and economic turmoil of 2022 we need a clear and coherent plan for taming inflation, unlocking private sector capital for regeneration and modernising and resourcing the planning system to allow the public and private sectors to partner together to accelerate the delivery of the housing, workspaces and local infrastructure that will drive growth.”
James Raynor, CEO, Grosvenor Property UK, said while 2023 is set to be a tough year, the property industry is inherently long term in its outlook with projects taking many years, and sometimes many economic cycles, to deliver.
“The survey results underscore this resilience with a continued emphasis on delivering the infrastructure the UK needs and the opportunity – economic, employment and societal - we help create. But to maximise our contribution we need a fit for purpose planning framework and a clear plan from the hovernment to reduce economic volatility.
“We shouldn’t be surprised that net zero is high on the agenda; addressing our carbon footprint isn’t just the right thing to do, the commercial and reputational case is increasingly clear. We’re already well on our way having reduced emissions by over 24% in the last two years. And with our pipeline of sustainable projects attracting premium rents, including our first net zero offices which will complete prelet soon, our early moves to do the right thing are supporting the business as the economy softens.”
Helen Gordon, chief executive of Grainger, suggest sentiment has picked up during January at the briefing on the survey, which was open until 10 January.
Grosvenor's Raynor said while the survey was a helpful litmus test of sentiment, the headlines were a little misleading as attitudes were more nuanced across sectors than it showed, particularly because of the so-called "flight to quality".
Both offices and retail, Raynor said, suffered in the survey but that did not take account of strong demand for the best space as secondary stock got left behind.
There was some surprise that political uncertainty in the UK was only fourth in the biggest strategic risks to the sector over the next 12 months with 29% of respondents flagging this. It is the second highest figure in the strategic risks over the next five years.
Beaver suggested new Prime Minister Rishi Sunak's honeymoon period of being perceived as providing stability may have already come to an end and that even now it would have risen up the chart as a major concern. The skills gap, at 29%, is the third biggest strategic risk flagged over the long term.
Remco Simon, chief strategy and investment officer, Landsec said investor confidence in UK plc has been dented by the political uncertainty of the last six or so years after the Brexit vote. "We have just sold Deloitte's headquarters in the City to Chinachem at a slight discount to the previous value, better than perhaps many had assumed." He said interest was remained then in prime London assets, but most notably from the Far East with European institutional investor interest waning in recent times.
Gordon said her advice to younger real estate professionals going through a first market correction was not to think that history was exactly repeating itself as there are always differences and the job of real estate leaders is to note the "flickers" in market sentiment that point to how the sector is evolving. "The hardest thing in real estate is to pull back from a transaction or a growth strategy. But you have to be prepared to do this."