In the third and final instalment of our 2023 Forecast blogs we are taking a look at the more traditional sectors of real estate – investment, debt, office, industrial and retail - as our experts lay out their predictions for the year ahead.
John Knowles, Head of National Capital Markets
A rough ride is to be expected in the early months of 2023, but also will offer good potential and opportunities for savvy and innovative investors. We have seen the UK markets being quick to reprice. With yields softening by 100-200bps across different sectors, optimism is building that investment momentum will return rapidly this year, provided occupier resilience proves robust against a wider economic recession. The demographically driven beds and sheds sectors remain good long-term prospects, although development will continue to be challenged by soft yields, income pressures and build cost inflation.
Laurence Richardson, Director in the Debt Advisory team
Despite greater geo-political and economic stability, volatile SWAP markets may fall further from the September peaks as the cost of living crisis bites, inflation falls and central banks adopt less aggressive rate policies. Funders are well-capitalised and have lent prudently since the GFC. Inflows are healthy and appetite for lending will grow. Nevertheless, there will be a continued flight to quality and ever greater scrutiny of income streams to service higher debt costs.
Asset pricing is shifting quickly to reflect higher funding costs, but we expect anchored-mindsets, quality product shortages and weight of capital to limit this adjustment. Leverage levels will be lower going forward to maintain acceptable debt yields, but lenders will need to moderate ICR thresholds in an increasingly competitive and fragmented market.
Alternative lenders will secure attractive risk-adjusted deals by virtue of their more flexible underwriting processes and risk analysis compared to traditional providers of finance. This will be especially true where owners fail to secure refinance terms from the incumbent lender owing to a stressed credit structure, rather than poor asset credentials.
Michael Hawkins & Dominic Pozzoni, National Offices
Carbon sustainability is at the forefront of company and employee agendas and will increasingly influence decision making when considering relocations, regears and refurbishments. Increased utility costs will also place greater demand for Net Zero Carbon accredited buildings. Construction costs associated with repurposing and ground up development will create winners and losers in this competitive contracting arena.
Given robust demand for Grade A office space in key regional capitals, we anticipate headline office rents to increase in 2023. We also expect to see flex sector growth continue next year in response to steady demand from both SME and corporate occupiers.
Len Rosso, Head of Industrial
Greater efficiency and warehouse consolidation through supply chain restructuring will become business critical to drive long-term operational savings for most occupiers. Online sales volumes will remain elevated but heightened economic uncertainty will translate into muted demand from pure-online players. Third-party logistics providers are expected to account for the lion’s share of take-up activity as inefficient marginal logistics operations are outsourced.
On the supply side we will see grey space back on the market in 2023 as developers commit to fewer speculative construction starts due to weaker land and capital values which is challenging development appraisals. Rental growth is expected to remain positive, supported by the historically low level of supply and resilient occupational demand.
David Fox, Co-Head of UK Retail
The rising cost of living should impact discretionary spend in H1 2023 with direct consequences for occupational demand.
In strong locations, the trend for top performers (e.g. JD Sports, Zara, Flannels) is to take advantage of rebased rents and expand into larger stores. This will be a significant face of change on the ground and will drive demand for standard shop units, especially where post-COVID rebasing has already encouraged modest rental growth. This growth is likely to re-emerge in the second half of 2023.
Out of town, strong demand for space from discounters and budget supermarkets is evident. The main barrier is lack of expansion space, competition from residential development and build costs. Pent up demand, though, is likely to mean any moderation of development costs will lead to competition across the market.
