Has UK commercial real estate reached an inflection point, where values have stabilised and a recovery is about to begin? This is the question dominating the sector right now.
`Nobody rings the bell when you reach the bottom’ is a more colloquial way of describing sentiment as real estate heads towards its traditionally busy autumn, with many people hopeful that after a very tough two years that a recovery is in sight.
Tempering this is caution that after a pre-emptive strike in August, 2024 may end with no further interest rate cuts and inflation not yet fully tamed.
Yet this prognosis is at the gloomiest end of the forecasts, and at Knight Frank it is our developing `House View’ that for UK real estate as we head into autumn the only way is up.
Our thinking is based on five macro factors, because property is a function of the economy, and there are five crucial factors atplay.
It’s also encouraging to point out that some of the industry’s most respected commentators also believe that real estate hasreached a turning point.
Aviva Investors’ Head of Real Assets Research David Hedalen and European Real Assets Research director Jonathan Bayfield published a paper in July, `Time to prepare for the next phase of the real estate cycle’, using data to show that the real estate market is turning.
They say that after the second half of 2022 saw UK property valuations fall by close to 22% followed by a continued erosion of values through 2023 and into 2024 there had been a peak-to-trough decline of 25%, with seven per cent wiped off values in October 2022 alone.
But Hedalen and Bayfield now argue that a `K-shaped’ recovery is taking place, with lower-risk, high quality real estate performing well and other assets experiencing challenges due to a pressing need for capital expenditure or significant occupier risks.
October 2022 was the month after Liz Truss’s mini-Budget and a lot has changed since then. And in the wider economy and real estate a fundamental reset is also taking place.
Here are Knight Frank’s five macro arguments for an autumn 2024 `inflection point’:
- The consolation from chaos: a new wealth of ideas to boost the United Kingdom
We have experienced a period of national upheaval which makes the 1990s and 2000s look like oceans of calm. Brexit, COVID and the arrival of Artificial Intelligence have sent political minds into over-drive and a wave of activity was set in motion by July’s hyper-active King’s Speech. These are in addition to the aftermath of mini budget and ongoing instability in Europe and the Middle East, which have also been major disruptors.
Amongst the noise and fervour post-election, there does appear to be enthusiasm among the wider business world for the activity and changes of direction proposed by the government – particularly for planning reform and in the longer term, business rates reform.
- A little luck – making the most of the current upswing
We believe that Chancellor Reeves’s description of her inheritance as the worst since World War II is overblown: the winners of the elections in 1979 and 2010 had more extreme situations to deal with, and with healthy economic growth, inflation down to around 2% and further interest rate cuts due to follow there are good signs as well.
- Investment nationalism: leveraging private sector investment
While Chancellor Rachel Reeves’ plans for a £7.3 billion national wealth fund are small compared with, for example, Norway’s $1.62 trillion (or $295,000 per citizen) wealth fund, it’s a start.
Designed to attract £3 of private funds for every £1 of taxpayer money it is aimed at raising investment in the UK and revives theconcept of public-private partnerships embraced by the Blair-Brown government with some success in the 2000s.
Anything that reverses UK pension fund disinvestment in UK real estate, infrastructure and equities will help and the reality is that it would only take a very small shift of these pools of capital back to this country to have a significant impact on the amount of money available for investment.
- Industrial strategy and supply side reforms
Boosting sectors from finance to tech – and stressing that there is a strategy after what some saw as chaos under the previous government – again adds to business’s feelgood factor.
- Why the UK?
All of a sudden, there is political stability in the United Kingdom and apparent turmoil around other big economic players. For those making long term bets, it is clear that both the absolute and relative outlookfor the UK has improved.
This is why we believe real estate – as a core function of the economy – has reached an inflection point. The big capital value falls of 2022 and 2023 are still painful, but they have stopped – and Knight Frank now argues that UK real estate is poised for recovery in rents and values.
William Matthews is a partner in Knight Frank’s capital markets research team
