26 Jan 2023

Real Estate Market Outlook 2023

Mark Bladon

Mark Bladon | Head of Investec Real Estate

UK real estate in 2022 felt like a year of two halves

 

Emerging from the Covid-19 gloom, the first half saw an encouraging recovery in investment and lending volumes.
 
Things came to a juddering halt in the second half, as the impact of the war in Ukraine had a severe impact on global economies, with the UK not immune. The knock-on effect of higher interest rates saw a dramatic slowdown across all parts of the market, led by a rerating in the listed sector.

“October’s mini-budget fiasco then triggered a domestic financial crisis and higher mortgage costs for millions.”

Against this backdrop, Investec Real Estate Finance enjoyed another strong year, providing nearly £1bn of development and investment finance across our private client and institutional client base, our best year since 2018. Milestones included passing £1bn of lending in the student accommodation sector, an incredible effort that reinforces our position as a first mover in the space, and growing our syndication and distribution team with several senior hires.

As we enter 2023 with a recessionary cloud overhead and the cost-of-living crisis dominating headlines, the outlook is uncertain. UK commercial dealmaking is at its lowest level for a decade. The future of the office debate is rumbling on. House prices are predicted to fall by anywhere between 5% and 20%

Whilst all boats rise and fall on the same tide, at Investec we are cautiously optimistic about the outlook for 2023, despite the extraordinary fiscal measures we witnessed in the second half of last year.

We retain a firm conviction in those sectors – residential for rent and sale, student, office and logistics – where we have been most active and have longstanding domestic and international relationships. Underpinned by structural and demographic drivers, as well as countercyclical characteristics in the case of student, demand for the best assets in the right locations will continue into 2023.

London, our deepest market, continues to retain its top spot at or near the top of global ranking lists and remains the UK’s, and one of Europe’s, most sought after destinations for businesses, residents and students. This will underpin continued rental and value preservation.

There are record amounts of private equity capital seeking deployment into real estate. Knight Frank’s recent Attitudes survey revealed that real estate remains an asset class of choice for HNWIs. And as pockets of the market retrench due to cost of funding challenges and legacy book issues, I believe there will be an opportunity for those lenders who can be flexible with the underwriting process and risk analysis to generate attractive risk-adjusted returns.

“Alongside a more stable political environment, we expect the macroeconomic picture to improve, with inflation falling and interest rates peaking in the middle of the year before falling back.”

This should see debt costs moderating substantially, encouraging new development and preventing any widescale distress. At Investec, with the backing of the broader bank, we are well-placed to deliver another profitable year of activity.