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The UK real estate market is facing a difficult time with interest rates and inflation further going up. In August, the inflation rate was 9.9%, one of the highest in 40 years, and economists expect it to rise through the remainder of 2022. This, combined with a political situation expecting to have a new government in 2 or 3 years, and with a complex macroeconomic situation, is leading the UK to a mild recession.
That and other matters were discussed at a Club Meeting last October 11th about the UK investments cycle with leaders from the real estate market.
For the members, the Bank of England (BoE) needs to increase the interest rates, currently at 2.25%, faster, even with the economy responding to the high demand in real estate.
Political volatility and speculation around Truss’ economic budget are causing doubts about the future of prime asset demand.
However, members agreed that they still saw the demand, and are underwriting deals with expectations that interest rates can drop off or stabilise. Yet the present overall worry is a stagflation scenario, what can real estate investors work with, if inflation continues to rise and the economy does not?
2023 might just be the year of Equity. Members see private equity groups skewing towards debt, as LP investors grow more insecure, and banks are retreating from project development risk. The discussion pointed out that 35-40 year loans will likely become the new normal.