26 Jan 2023

Mark Bladon’s Real Estate Market Outlook for Q1 2023

Mark Bladon

Mark Bladon | Head of Investec Real Estate

UK real estate debt market remains open for business despite uncertainty.

 

Any hope that the volatility witnessed at the end of last year’s final quarter would subside in the first quarter of 2023 ended with last month’s high-profile banking sector collapses, which, after initially looking like being confined to the US, went global with the bailout of Credit Suisse.

Whilst the read across to the UK real estate sector looks minimal at this stage, the full repercussions are still being felt. However, the hope that interest rates would start to fall in the second half of the year looks increasingly unlikely. One small consolation may be that more aggressive tightening by the Federal Reserve System, whose decisions tend to impact those of other central banks, may also have been put on hold.

Closer to home, the UK economy remains on a tightrope between recession and growth as exports slip but the public’s inflation expectations eased in March.

“Despite the uncertainty, the attractive risk adjusted return profile of fixed income, coupled with the underlying performance of certain asset classes, has seen the UK real estate debt market remaining very much open for business.”

With pockets of the market continuing to retrench, either through choice or as a result of funding or legacy book challenges, and with borrowers facing refinancing pressures, the opportunity for those highly experienced lenders, with established platforms and the ability to write larger tickets, such as ourselves, remains compelling.

The Living sector, which enjoyed a record year in 2022, continues to be the standout performer.  A recent Savills survey revealed that almost half of investors expect the proportion of their assets under management allocated to the European living sector to increase significantly by 2025, with the UK & Ireland top of wish lists.

This is being borne out in the market, with investors, both global and domestic, continuing to pile in. Last month the Superannuation fund Aware Super announced a c. £500 million investment into Get Living, whilst US private equity outfit Harrison St has agreed to finance Birmingham’s largest ever multifamily development. Rental developer operator Moda Living also recently announced it was launching a new student accommodation platform.

Whilst we have an extremely healthy pipeline, we remain alert to the impact of a higher for longer interest rate environment. Economic indicators are encouraging, with the housing market remaining relatively resilient with average prices increasing by 1.1 percent in February according to Halifax. At the same time, mortgage approvals rose for the first time in six months in February suggesting that the collapse in demand for property seen in Q4 might be bottoming out.

Adapting and expanding our offering to meet evolving client requirements will be increasingly central to our strategy, whether it is entering new sectors such as regional single family, or progressing our sustainability pathway to meet increasing regulatory, investor and sponsor demands.

“With the backing of the wider bank, we are as well placed as we can be to deliver another strong year of lending across our target sectors.”