The easing of inflation and interest rates rises will prompt a major return to United Kingdom commercial property investment in the second half of this year after a slow first half, global brokerage JLL said, at a wide-ranging briefing with key industry players, laying out its predictions for 2023.
Sharing its findings with an audience of property professionals at a hotel in Leicester Square, including a keynote speech from Elon Musk's former communications executive, JLL reported investment volumes for 2022 reached £48.6 billion, a 22% decline on 2021 volumes of £62.7 billion, and 8% below the 10-year average of £53.1 billion.
Looking to capital flows for the year ahead, JLL said activity will improve in the second half of the year and that the focus will gradually move from yield shifts to income resilience, in particular occupational risks and the best areas for rental growth. It thinks most activity will focus on core assets where rental income is regarded as most secure.
In terms of investors targeting UK real estate, Asia-Pacific buyers, particularly those from Singapore and Hong Kong, will make up a higher slice of buyers in 2023 compared with recent years. German buyers will also re-emerge as opportunities arise. The huge, energy-driven flows of capital into Middle Eastern sovereign wealth funds, away from Russia, could mean they become major players as the year progresses, JLL added.
JLL says occupiers will increasingly seek partnerships with landlords to achieve their goals and reconcile increasing costs with ambitions to transform and upgrade real estate in 2023. There will also be an increasing appetite in areas such as life sciences for partnerships with investors, developers, local authorities and educational and research institutions, which will propel regeneration.
Leasing markets will see polarisation and pockets of rental growth according to JLL, with rents most buoyant in the "super-prime" segments.
Occupier demand for offices will focus on high quality space with "superb sustainability and design credentials" and that means investors will too.
This is expected to add to a major obsolescence problem in the secondary market as rental growth continues to polarise.
In industrial it will remain a landlord’s market, JLL says, with the imbalance of supply and demand, particularly in the mid-box and urban logistics sectors meaning rents hold up.
JLL says the complication is the business rates revaluation which will bring instant benefits for the winners, mostly those in the retail sector, and a slower ratcheting of costs for subsectors that have seen recent rental growth.
Jon Neale, head of UK research at JLL, said 2023 is going be a difficult year for many businesses, but there will be some tentative evidence of improvement in the second half, particularly in the core investment market.
"But if companies solely focus on survival, rather than on longer-term trends, they will struggle; the pressures that have begun to emerge during the last cycle – sustainability, urbanisation, greater occupier selectivity and more demanding requirements – will only intensify in the next one. The polarisation that has been seen over the past few years will intensify over 2023, but that may just be the start.”
Stephanie Hyde, the chief executive of JLL UK, added: "Despite the ongoing headwinds, the majority of investors and corporates alike have set clear objectives and targets for decarbonising buildings, and 2023 will be the year in which these ambitions turn into actions.
"Small and medium sized businesses will also start to develop and implement sustainability strategies en masse, spurred by the mounting evidence of the financial, social and environmental returns. However, given cost pressures it will become clear that increased tenant and landlord collaboration – through engagement as well as financing – is imperative to making progress possible."
Hyde added that reinvention and repurposing will be a major theme of development in 2023, even if immediate activity is constrained by economic conditions. "Investors have been watching the retail sector for some time, and values have now reached a point where large-scale reimagining is possible. There will be generational opportunities in this sector."
Hyde added that the government's flagship levelling up agenda for the country may falter given economic conditions but the underlying drivers behind it will intensify. "The significant role that private sector partners play in delivering regeneration projects will be all the clearer as local councils see revenues fall and look to maximise the economic and regenerative potential of the assets that they own.”
Hyde said a survey of JLL clients recently had found the biggest issues are economic uncertainty, sustainability, the impact of technology and the future of work. "Key too is looking at how we make hybrid working work."
Dex Hunter-Torrike, head of communications for the oversight board for Meta, and the former head of communications at SpaceX, executive communications manager at Facebook, and an executive at Google, was an entertaining keynote speaker touching on the future of the workplace as well as pretty much everything else.
He said his job interview with SpaceX owner Elon Musk, currently the world's second richest man, had turned unexpectedly into freewheeling debate on what a government on Mars should look like.
That was the starting point for Hunter-Torrike to predict the next decade will be the most disruptive in human history as he pointed to the Metaverse and AI as among the areas that real estate must embrace now while they are in their infancy. He even wrote a song on real estate with AI while on stage which began "In London, real estate is a cruel world". His key message was "accept the audacious".
JLL chief Hyde interviewed a panel of senior executives with roles closely connected to real estate decision making: Dr Andy Williams, vice-president of Cambridge Strategy at AstraZeneca; Neil Slater, global head of real asset at Abrdn; Janine Cole, sustainability and social impact director at GPE; and Gabbie Cooney, head of real estate strategy and execution at Barclays.
Williams, who oversaw the development of a £1.1 billion campus for the pharmaceutical giant AstraZeneca in Cambridge during the pandemic, said a huge issue was stopping the barriers blown away during the pandemic around how people work and inhabit work environments from re-forming. Williams has focused on hot-desking and hot-benching within campuses, as well as the contribution major relocating companies can make to communities.
Cole said sustainability had moved front and centre for real estate and pointed to a range of areas for instance the reuse of steel in one office in its new developments, where GPE was making strides.
Cooney said the opportunity for real estate was to respond to demand for fluidity and scaleability from occupiers, away from what she termed the "static built environment".
Slater said benchmarking sustainability and building it into real estate will be "commoditised" in five years with everyone signed up to it because of the demand of the regulatory system and capital. "The bigger work, and most exciting, to look at now is the societal impact of real estate."
He also pointed to Abrdn's recent £500 million tie up in the build to rent space with department stores giant John Lewis, confirming the first three schemes will be in Bromley, West Ealing and Reading.
"The exciting thing is what would people want from John Lewis most. They want the trust factor, they want it to be nice to to be in - not super luxury but a great environment - and they want a social benefit. And this is the basis for a long-term residential platform really. Perhaps extending for instance into the healthcare housing space given the demographics and the John Lewis brand."