The market signals action is ahead

The task of creating towns and cities fit for the future is no small one, but the real estate industry appears ready to take on the challenge. Optimism has retained the buoyant position it reached in 2021 compared to previous years: 65% of respondents were optimistic about the UK real estate market in
 he short term, compared to 64% in 2021. More respondents were very optimistic: 12% compared to 7% in 2021.

This reflects general industry consensus that the UK real estate sector is set to continue to recover as 2022 progresses. CBRE’s UK Real Estate Outlook predicts returns to be just over 6% for the year. Though issues remain, such as the impact of the war in Ukraine and inflation, challenges created by the pandemic have released their grip on sentiment, leaving the industry seemingly ready for action.

There is an increased sense of dynamism, with real estate professionals who had lost hope in town centres now seeing values in the hardest hit sectors bottoming out – and coming up with creative solutions across the board to repurpose real estate and rethink the world’s town and city centres.

In fact, real estate professionals say that almost 30% of their property is earmarked to be repurposed – a stunning prospect when we consider the size of the
UK real estate world.

As the pandemic has subsided, it has become evident that for many its impact has not been as great as perhaps feared. More than a quarter (26%) of respondents in 2022 believe that the real estate investment market has already recovered to pre-pandemic levels.

The rise of residential

Industry respondents signalled that most asset classes are more appealing for investment than in previous years. Notably, for the first time residential is the most widely appealing asset class.

While distribution/logistics remains appealing, the slight reduction compared to the previous two years signals an easing in the pace of the market. Online retail boomed during national lockdowns, but this result suggests that the sector might have peaked in terms of investor interest.

With this research having been repeated over 10 years, we classify residential as investment in existing residential assets to reflect the thinking when our research began.

The private rented sector (PRS) was hot on the heels of residential investment as an appealing asset class, with GBP 4.3bn invested in BTR in 2021, according to Knight Frank, up 19% on 2020, which was already a record year.

A return to the office

Office and retail both saw a huge resurgence in sentiment back to 2016 levels, after a period of noticeably lower appeal. Now the height of the pandemic has passed, there can be a belief that people are again visiting real estate.

The office sector has emerged renewed from a turbulent period. When much of the workforce started working from home, some predicted a demise in the use of offices. Many studies have indicated this has not materialised, as people missed the interaction the workplace provides. “Hybrid working” has arrived, and though people may spend less time in the office, they will still visit.

When industry respondents were asked how their working life may change in 2022, 44% said they will work from home more but 43% said they will use the office as a hub to meet with colleagues. At the same time 60% of respondents believe a more modern/collaborative office will encourage the workforce to visit more often, while 63% said a high-quality/well-fitted office would entice people to visit.

The source of demand

Turning to where increased commercial real estate occupier demand might come from in the next two years, healthcare is popular, selected by 52% of respondents.

And in terms of level of appeal to investors the figure for healthcare has stayed close to its 82% high during the COVID-19 pandemic, at 77%.

While appetite for investment appears strong in 2022, what remains to be seen is how the industry will work to transform all asset classes, to deliver what consumers are seeking in a post-pandemic world. The high level of optimism and desire to invest in assets suggests that many of those we surveyed are up for the challenge.

Compared to the previous three years, respondents regard London as expensive. 60% of respondents believe the London real estate market is overvalued.

This opinion reflects a strong bounce back in Central London investment since the pandemic eased, primarily driven by overseas investors. CBRE reported in its UK Real Estate Outlook, published in December 2021, that the level of global equity targeting London office property reached a near-record GBP 40.13bn by the end of November 2021.

Notably, 10% believed London is undervalued, a figure, during the course of our research, was only topped in 2021. The high figure in 2021 could be explained by the timing of our poll, which took place during the height of uncertainty during the pandemic.

This divide in opinion in 2022 could highlight diverging views on the value of specific asset classes. Investors are still assessing how working and living habits post-pandemic affect the built environment.

It could also indicate that we are likely to see a high level of investment in Central London real estate during 2022 and into 2023, as investors look to take advantage of stock that they perceive as undervalued.

At the same time, office yields in Central London continue to be higher than in other key cities around the world. According to Savills, prime yields for Q1 2022 were 1.7% in Hong Kong, 2.5% in Paris, 2.6% in Tokyo, 2.7% in Frankfurt, 3% in Madrid and 3.75% in the City of London. This shows that there is still value to be had for investors in London as they weigh up its pricing compared with competitor cities.

Our polling also found that more than three quarters of real estate professionals believe that London is a financial capital of the world, and 85% believe the UK is an attractive location for domestic investment.

London attracted more foreign investment in 2021 than any other city, according to the City of London Corporation. A total of GBP 600m was invested by overseas investors into financial firms in London, topping investments in the likes of Dubai, Singapore, New York and Paris.

Turning to the “big six” UK regional cities, not surprisingly, Manchester remains the most appealing as an investment target, which has been the case since our study began, followed by Birmingham and Bristol. All cities are more appealing than they were in 2020.

The wider context

Our survey suggests that Brexit continues to be a real concern for the industry. 85% of respondents believe that Brexit is impacting supply chains to the point of having a negative impact on the construction industry.

Figures from the Insolvency Service show that insolvencies in the UK construction sector in Q1 2022 were up 51% compared to the Q1 of previous year. In February alone, there were 307 insolvencies in the construction sector, a 142% increase on the same month in 2021.

More than 60% of respondents also believe that Brexit has disincentivised international investment in the UK real estate sector. This could reflect polarised views and the strength of industry feeling towards Brexit; respondents may argue that investment would have been even higher despite Brexit.

Taking industry views on the challenging goal to reach net zero carbon, one thing is clear: much more effort is needed. While the proportion of industry respondents who say their companies have already achieved net zero has more than doubled since 2021, so has the proportion of people who believe their companies will never achieve it.

In November 2021, COP26 shone a stronger spotlight on the need to reduce carbon emissions. The UK Government had already put into legislation the requirement to reduce the UK’s carbon emissions by 100% relative to levels in 1990 by 2050 – effectively, to be a net zero emitter. Following the Glasgow summit, Governments are being asked to submit stronger targets for 2030 with the aim of limiting global warming to 1.5 degrees Celsius.

Clearly, real estate has a huge part to play in that goal. The UN says that the global built environment contributes 30% of global annual greenhouse gas emissions and consumes around 40% of the world’s energy.

Encouragingly, 62% of respondents believe that the real estate industry will meet the UK government’s target by 2050 if not before. However, that does leave more than a third of respondents who do not believe the sector is doing enough to meet the UK’s target.

Creating and understanding the path to net zero is a rising priority, evidenced by the high number of respondents who are hopeful that net zero can be reached. In our chapter on the town centre of the future we highlight consumers’ environmental concerns when considering the future of towns and cities, as well as industry’s. To many, there is a lot of action still to be taken.

Overall, the industry’s views on the market in 2022 reflect optimism across the board after a period of real turbulence and concern. From a desire to invest in creating the towns and cities fit for future needs, to an ambition to reach net zero, our survey indicates how far sentiment has travelled since the pandemic first started.

The challenge for investors now is to channel this optimism into meeting the evolving needs of society today. But it’s not only down to the real estate industry to direct attention and investment towards repurposing towns and cities across the UK. The Government’s Levelling Up & Regeneration Bill and publication of the Levelling Up White Paper corroborate that repurposing is a major concern.