Credit: ingusk | Adobe StockUK: Liquidity stands strong against inflationary headwinds
Discussions at Europe GRI 2023 assess the current state of the UK real estate market considering current economic turbulence
October 30, 2023Real Estate
Written by Helen Richards
One of the biggest markets in Europe, the UK remains interesting for investors considering the quicker repricing and higher liquidity compared to other European markets, as well as its substantial lead in ESG.
Following recent economic fluctuations, one of the key lessons learned has been to identify asset classes which are better equipped when faced with inflation. Operative models such as hotels, self-storage, and co-living have demonstrated higher protection against inflation compared to traditional assets. Consequently, core funds are reevaluating their strategies and approaching office investments with caution.
Equity deployment is currently less attractive than in previous years, contributing to the wait-and-see sentiment and thus a quieter overall market in comparison to pre-COVID.
During this uncertain time, alternative lending options were highlighted as interesting opportunities with high returns, considering the step back of banks and traditional lenders at present.
Regarding assets, there are many in the market that are not investable in their present condition, nor will refinancing be easy. Banks are cautious about lending, with the Bank of England being more stringent than the US Federal Reserve. Opinion broadly suggested that as economic conditions improve, however, banks may gradually reenter the market.
Notably, LTV ratios have garnered more concern for old loans, for which ratios are on the higher side, while new loans show higher concern for Interest Coverage Ratios (ICR).
Strength of regional markets varies across asset classes. Student housing and residential properties exhibit a more region-agnostic nature, while offices are city-specific meaning more regional variance in the sector.
However, yields in the multi-family sector remain low, creating challenges for capital deployment. Construction costs, shortage of labour, and inflation have made development challenging, although participants were optimistic that more recently the situation has been stabilising.
From a sustainability perspective, repositioning existing buildings is becoming a more attractive option compared to development, although alternative lenders are open to funding development deals.
Underwriting strategies have been conservative and over the long term rental growth is not expected to be higher than slightly above inflation. Coupled with expected rental caps, the future outlook is more prudent than before.
Global LPs are also increasingly focused on ESG considerations, further prompting efforts to align portfolios with sustainability goals.
The UK’s top real estate voices will be gathering next year for GRI’s leading UK conference: ‘GRI UK & Europe Reunion 2024’ on February 21-22 in London. Read more and register here.
One of the biggest markets in Europe, the UK remains interesting for investors considering the quicker repricing and higher liquidity compared to other European markets, as well as its substantial lead in ESG.
Following recent economic fluctuations, one of the key lessons learned has been to identify asset classes which are better equipped when faced with inflation. Operative models such as hotels, self-storage, and co-living have demonstrated higher protection against inflation compared to traditional assets. Consequently, core funds are reevaluating their strategies and approaching office investments with caution.
Transaction Challenges and Opportunities
Transaction volumes have been historically low, however sectors such as logistics and life sciences continue to experience high demand. Deal sourcing and capital raising remain challenges, but creative deal structures exist to navigate these hurdles.Equity deployment is currently less attractive than in previous years, contributing to the wait-and-see sentiment and thus a quieter overall market in comparison to pre-COVID.
During this uncertain time, alternative lending options were highlighted as interesting opportunities with high returns, considering the step back of banks and traditional lenders at present.
Regarding assets, there are many in the market that are not investable in their present condition, nor will refinancing be easy. Banks are cautious about lending, with the Bank of England being more stringent than the US Federal Reserve. Opinion broadly suggested that as economic conditions improve, however, banks may gradually reenter the market.
Notably, LTV ratios have garnered more concern for old loans, for which ratios are on the higher side, while new loans show higher concern for Interest Coverage Ratios (ICR).
Strength of regional markets varies across asset classes. Student housing and residential properties exhibit a more region-agnostic nature, while offices are city-specific meaning more regional variance in the sector.
Europe GRI 2023 panel: ‘Challenge UK’ (Image: GRI Club)
Interest Rates Outlook
Participants anticipated a rise in interest rates in the next 6-12 months, followed by stabilisation, but the low cost of debt experienced before the pandemic is not expected to return any time soon. Consensus acknowledged that the age of free money is over for the near term.UK Housing Market
The UK's housing market has witnessed significant price increases, with the house price-to-income ratio now 8.3 times higher than at the start of the century. While this trend needs to be factored into underwriting, there is still substantial interest in the sector, especially in funding the Build-to-Rent (BTR) sector. With affordability for homebuyers relatively low, the BTR sector is stirring.However, yields in the multi-family sector remain low, creating challenges for capital deployment. Construction costs, shortage of labour, and inflation have made development challenging, although participants were optimistic that more recently the situation has been stabilising.
From a sustainability perspective, repositioning existing buildings is becoming a more attractive option compared to development, although alternative lenders are open to funding development deals.
Underwriting strategies have been conservative and over the long term rental growth is not expected to be higher than slightly above inflation. Coupled with expected rental caps, the future outlook is more prudent than before.
BTR & Foreign Capital
The BTR residential sector is particularly appealing to cross-border investors, especially those from the Asia-Pacific region where financing costs are lower. In addition to faster repricing, liquidity concerns in the UK are relatively low compared to other European markets, attracting cross border capital - particularly from the Middle East, Singapore, and Hong Kong.Global LPs are also increasingly focused on ESG considerations, further prompting efforts to align portfolios with sustainability goals.
The UK’s top real estate voices will be gathering next year for GRI’s leading UK conference: ‘GRI UK & Europe Reunion 2024’ on February 21-22 in London. Read more and register here.
