Lender and investor sentiment has improved compared with 12 months ago, according to Savills' 36th Financing Property report, which has been unveiled at an event in London.
According to a poll of attendants, they are more likely to lend and invest in the living sectors, residential development and prime logistics.
“Positive sentiment is returning, with the living sectors, residential development and prime logistics most favoured by the London lender and investor community,” said Nick Harris, Savills head of UK and cross border valuation. “It is interesting to note the divergence of views on where the markets are heading has tightened across most asset classes, suggesting greater comfort has been reached on price discovery.”
Harris said that last year the mood could be summed up as "are we nearly there yet?", and the answer this year is "not quite yet".
Savills noted that 2023 ended with around £40 billion of assets traded, down significantly on historic levels. And, despite the early optimism for the market in 2024, the transactional data represented a first-quarter 12-year low. However, there have been some high-profile transactions and there is an expectation that volumes will improve as the year progresses and the recovery takes hold.
Given the low transactional levels, new loan originations were at their lowest level since 2012 with the recent Bayes survey suggesting only around £32.6 billion was originated, down a third on 2022. Much of the activity was focused on refinancing with many lenders increasingly working with their borrowers to restructure loans.
“Many lenders have told us that they expect substantially more activity in this space over the next 12 months,” said Harris. “Of course, with higher borrowing costs and declining values in many sub-sectors, when investors come to refinance or restructure a loan, there is a risk that there will be a gap between the level of debt required, and the amount of debt lenders are willing to offer and this raises a question over how the funding gap will unravel over the next few years.”
Addressing the commercial property market, Mat Oakley, head of commercial research at Savills, notes that while UK investment volume has recovered from its low in the third quarter of 2023 and prime yields have started to harden, investment activity is still being held back by both expectations of recovery and the hunt for distress.
“The post-great financial crisis period suggests the peak in distressed sales will come in the next couple of years,” said Oakley. “Some sectors will recover quicker when interest rates come down especially in sectors where there is conviction or mispricing and we’re already starting to see yields harden for retail warehouses, industrials and hotels.”
On pricing, Savills said the market is still exercising caution until trading volumes are normalised but the agent believes pricing is close to, or at the bottom, for many prime sectors in the UK. Overall, pricing is around 25% down from June 2022, but this varies significantly across sub-sectors.
From a residential perspective, Savills said that there has been a reversal of pandemic trends with commuter locations performing stronger than rural and lifestyle locations. In London flats are outperforming houses and UK house prices are expected to grow by 21.6% by 2028.
For the build-to-rent sector, there was £4.5 billion invested into the sector in 2023, the second highest on record.
Emily Williams, director in Savills residential research team, said: “The UK housing market has performed more strongly than many had anticipated this year, with an anticipated rate cut and improving economic outlook creating more capacity for house price growth.”
(Updated on 22 May to state that the £4.5 billion invested in the one-but-last paragraph refers to the build-to-rent sector)