UK real estate, and in particular residential, logistics and operational sectors, will continue to attract strong investor interest for the rest of the year despite a backdrop of rising inflation and interest rates, according to CBRE.

Its mid-year UK Property Outlook include its expectations for the second half of 2022.

The UK economic outlook has deteriorated since the start of the year and as a result sentiment in the office market has weakened, CBRE says. It thinks this could persuade some occupiers to pause decision-making on moves, resulting in a slowdown in take-up. But the broker still expects the final quarter to see an improvement in leasing as occupiers press to complete deals before year-end.

Concerns over inflation and rising interest rates could cause office investment activity to slow in the third quarter but with a strong first half, investment volumes for the full year are likely to remain healthy, but below the levels seen in 2021, CBRE says.

Following the initial gains seen when COVID-19 restrictions were eased, UK footfall has remained relatively stable in the second quarter of 2022, and this is expected to continue in the second half. CBRE expects online penetration levels will only see moderate growth in the second half but this could be disrupted as the changing economy shifts consumer preferences.

Rising costs will are likely to cause some retailers to review growth plans. But CBRE points out that many occupiers have already undertaken portfolio restructuring during the pandemic, and as such, it thinks vacancy rates will remain stable.

CBRE thinks the interest rate changes means retail yields present an attractive proposition for investors and investor appetite for the sector should match the levels seen in the first half of 2022. While repurposing opportunities are still likely to come to market, increased construction costs could delay "actioning plans", it adds.

Logistics occupier demand will remain high, still driven by permanent shifts in consumer behaviour and restructuring of supply chains, CBRE predicts. Speculative developments will continue to increase although "not quickly enough to keep up with surging demand" and this will increase rental growth, with some regions continuing the double-digit growth seen in 2021.

The investment market will face further pressure from the macroeconomic expectations and rising cost of debt. But CBRE expects that conviction about the logistics sector will remain robust. Environmental, social and corporate governance requirements along with automation and robotics will become increasingly important, it predicts.

Jen Siebrits, head of UK research, CBRE said in a statement: “We anticipate that the Bank of England will continue raising interest rates to combat inflation with the Bank Rate reaching 2.3% by year-end. Although this could put pressure on some parts of the property market, we expect sectors that are underpinned by a proven track record of resilience to inflation, in particular healthcare, leisure, multifamily and logistics will continue to see increased demand from a broad range of investors for the remainder of the year.”

In May 2022 available housing supply outpaced demand for the first time since early 2019, CBRE reports This reflects more challenging conditions for buyers and points to lower activity for the remainder of the year, it says. But in some areas sales will be supported by the ending of the Help to Buy scheme, with prospective homebuyers wanting to submit applications prior to the October deadline.

Any moderation in activity will take time to feed through to pricing and so CBRE UK forecasts house price growth of around 8% in 2022.

Investment into the residential sector will be strong for the remainder of the year, it predicts, driven by keen competition from investment capital targeting the sector. Year-to-date deals, combined with the under-offer pipeline, indicates that 2022 will exceed the record high of £4.4 billion invested in 2021.

CBRE expects to see a tightening of regulation and disclosure requirements, which will lead to greater transparency in properties’ sustainability credentials.

Businesses will refine their climate transition plans, the disclosure of which will become mandatory under the sustainability disclosure requirements likely in 2023, aligning with the UK’s 2050 net-zero objective.

Data on sustainability performance will become more readily available, and CBRE says this may allow more robust investigations into the relationship between sustainability and financial value.

Pent-up consumer demand for most leisure activities remains, CBRE reports, but most leisure businesses are facing the dual macro-economic challenges of higher inflation and interest rates.

On the investment side, the weight of capital targeting leisure markets has offset any drag but should interest rates rise further, the cost of borrowing "may start to impact pricing from leveraged investors".

In the hotels sector, good financing conditions for core and high-quality assets are still available, and CBRE expects that as international travel returns, investors are optimistic this will translate into renewed investment activity in sector.

London and metropolitan cities such as Edinburgh should continue to see strong performance in the second half, supported by international travel and events such as the Edinburgh Festival and Commonwealth Games.

The healthcare sector continues to attract investors, thanks to strong operators and rent underpinned by trading performance that has proved resilient throughout the pandemic.

CBRE says that with record levels on NHS waiting lists, the private acute care sector is "well placed to capitalise through 2022 and beyond". It expects to see several large-scale investment transactions in the second half of the year as well as new development of smaller, specialist acute care facilities.

CBRE also expects to see a surge in retirement rental stock to meet the needs of an aging population that increasingly seeks optionality and flexibility which in turn creates investment opportunities.