In a break from precedent, it looks increasingly like the Bank of England and European Central Bank will cut interest rates before the Federal Reserve. Given the reasonably relatively rude health of the UK economy – inflation is trending in the right direction, the housing market has rebounded, whilst unemployment is set to peak below 5% – the BoE shouldn’t be afraid to be bold. Our expectation continues to be that we will see 75bps of interest rate cuts in the UK, commencing in Q2. Although there is a risk that easing will start a little later and that the decline is a little shallower than this.

I share the view of one of the big agents who I spoke to recently: It's not a case of has the bottom of the market been reached, but how quickly will it rebound? A lower rate outlook should increase confidence in the market, driving liquidity as the cost of servicing debt comes down and assets start looking cheap.

I share the view of one of the big agents who I spoke to recently: It's not a case of has the bottom of the market been reached, but how quickly will it rebound?

Despite the higher rate backdrop, conditions in the credit market have remained robust. Whilst longer-term capital continues to sit on the sidelines, we are starting to see more opportunistic capital looking to get a march on the rest of the market, whether its investment, repositioning, repurposing or more general capex, and this underpinned a very strong end to our financial year.

Within the business, we have continued to evolve our offering in response to client demand. Last month we launched a new real estate equity strategy, Investec REALIS, providing global investors with deal-by-deal access to institutional-quality UK real estate and the attractive returns it offers. We are targeting c. £250 million of deployment within two years and have completed a first acquisition of an office asset in Guilford.

We are also in the midst of our latest major thought leadership project. Following on from last year’s successful Future Living 3, we have just completed the polling stage for our second Private Client Sentiment Survey. The initial findings are hugely encouraging, with increased appetite for real estate exposure and the consensus being that the worst is firmly behind us.

Alongside our long-held high conviction sectors, Living and industrial, where the rental growth prospects remain very compelling, there is a level of optimism around pockets of the office sector that we haven’t seen for a long time. Alongside the City and West End in London, most of the UK’s big cities face a significant undersupply  of sustainable, Grade-A office space.1

As more businesses look to rightsize their office footprint, so demand for the best product will significantly outweigh supply. Later this year may also mark a turning point for secondary and tertiary office product, if values fall enough to make redevelopment or repurposing viable.

Challenges remain, including the pricing disconnect between vendors and buyers, which is perhaps most pronounced around land values. Until this narrows, we are unlikely to see widespread development activity but we anticipate that the pool of motivated sellers will increase as the year goes on, which should kickstart activity in both the development and investment markets.

 

1 Savills UK | 5 of the Big 6 office markets undersupplied says Savills