In this article, we take a look at the state of the UK real estate sector, identify positive signs in the short to medium term, and select a few sectors that we think are likely to perform more strongly over the next year or so.
Where are we now?
Clearly, the post-pandemic picture has been choppy for UK real estate. Both national and international headwinds have had an effect on the sector in the last year and, with inflation increasing globally and interest rates rising to try and tackle that, both the residential and commercial sectors in the UK have been impacted.
Although the economic picture has thawed slightly and it appears the UK may now avoid a technical recession, growth is still stagnant – this landscape presents a risk that the residential housing market becomes somewhat illiquid not least due to unattractive interest rates. Similarly, there has been a steep capital decline in the commercial real estate sector over the last six to nine months with market volatility and ever-increasing interest rates resulting in investor caution.
What’s the outlook for UK real estate finance?
However, there is cause for optimism in the short to medium term. Debt levels in the commercial real estate sector being comparatively high means that many of the negative impacts of the lack of debt liquidity shock should now have been priced in. Moreover, although debt pricing will remain higher than previously, the base rate is forecast to stabilise and even decrease by the end of the year. This stabilising environment may pave the way for capital inflows, with debt funds and alternative lenders stepping in to deploy capital against good quality underlying assets.
There is also an opportunity for lenders and borrowers who adapt to the ever-changing post-pandemic landscape. Many more stakeholders are now concentrating on the social benefits and impacts of real estate; in both the residential and commercial sectors, people increasingly want to spend their time in buildings which they perceive to add value to their life in ways such as socialisation or fulfilment. With working habits also changing the way people interact with one another, the investments/developments that best deliver these requirements will be most in demand.
Which sectors are predicted to remain attractive for lenders?
An obvious area of growth is the living sector; student accommodation, build to rent and senior living. Pricing for debt in these sectors has moved out less in the last year than in other sectors, demonstrating its resilience and we expect demand for investment to continue to increase moving forward.
Life sciences is also predicted to maintain its rapid growth as a sector. Over recent years, both Oxford and Cambridge have seen huge capital inflows for life sciences investments and developments with a huge amount of demand for high quality space, and we expect this to continue for the foreseeable future.