2023 – The year to lay the foundations for future growth

As we entered 2022, few would have predicted the broadsides that would impact the UK economy and its property market. Russia’s invasion of Ukraine and China’s zero Covid policy have put pressure on global supply chains leading to increased inflation, and the Bank of England’s attempts to curb this by rising interest rates, compounded by the market response to the ‘mini budget’ have pushed borrowing rates to their highest level in years.

Prime Minister Rishi Sunak has stated that reducing inflation is one of the Government’s key priorities for 2023, and economic analysis indicates both inflation and interest rates will come down throughout the year. This is welcome news, but in the immediate term the cost of borrowing will remain higher and both loan to value & credit control criteria will be more challenging for borrowers and investors than we have seen for some years.  

For many, 2022 was a reactive year as we responded to global events and domestic political uncertainty, and this led to price volatility. As we all now adapt to the new market conditions characterised by high inflation and higher interest rates, it is anticipated that prices will stabilise through the first half of 2023 and there will be a raft of opportunities for investors and owner occupiers able to enter the market across all asset classes.

Cash is King and Income is the Focus

This is especially true for those who do not need debt finance to transact on property. Cash is king and will remain a key catalyst to transactional activity at all price points in the market throughout 2023 and into 2024.   

Whilst those who have financed debt funded transactions are now having returns squeezed by interest rate hikes, those investors and owner occupiers with cash and low gearing will be in an ideal position to enter the market and acquire assets at a discount compared to 12-18 months ago. With the UK predicted by The British Chambers of Commerce to emerge from recession and return to growth no earlier than Q4 2023, albeit the precise timing appears fluid as of today, current market conditions provide opportunity for buyers to secure assets that could provide long term capital and income growth.

We are seeing early shoots of investor activity returning to the market with the opportunity to acquire compelling and well-priced assets. In recent months, we have seen an increasing trend from owner occupiers seizing the opportunity to use the fall in pricing to invest in their offices and business premises, particularly in the City Fringe and east London. We expect this trend to continue throughout 2023.

We also anticipate that there will be a greater focus on income returns. Whilst we will see activity across all asset classes, this focus on income rather than capital growth will see increased demand for ‘beds’ in the build-to-rent, co-living, hotel and purpose-built student housing sectors with both domestic and overseas investors continuing to target these sectors. How individuals and businesses meet their accommodation needs in major UK conurbations will continue to shift towards schemes offering ever higher quality space and service levels with complimentary leisure and workspace amenity putting the resident community experience at the heart of the business model.

Responding to societal trends will also present opportunities for building owners to generate income by changing the permitted use class of their building. We are currently advising clients across a range of asset classes on how they can optimise occupier demand, income flow and the capital value of their asset.

The cost of debt will impact on investment returns throughout the year, and potentially cause problems for those needing to refinance in 2023.  Our Receivership & Recovery team has seen a corresponding uptick in enquiries from lenders to put in space strategies to mitigate risks.

The costs of finance could also continue to hinder the warehouse, industrial and logistics market. Investor demand in this asset class was hit hard in late Q3/early Q4 2022 following the mini budget, but we are slowly seeing activity pick up again driven by the continued trend for short supply chains and final mile delivery and e-commerce maintaining buoyant occupier demand. However, 2023 is unlikely to see a return to the value peaks of 2021/2022. Rental growth will continue driven by the lack of supply which is predicted to worsen in core locations given the increased finance and construction costs which will slow the development of new industrial sites.  Environmental and sustainability factors remain a requirement for some businesses where demonstrating ESG compatibility to their client base is becoming more important. 

The continuing trend for agile and increased levels of home working will continue to drive change in the retail and leisure markets. The move towards more localised consumer spending sparked by the pandemic will present opportunities for investors and occupiers in commuter towns and London suburbs, with these locations seeing an increasing move towards Food and Beverage, leisure and experience-led retailing as traditional retail businesses continue to shift online.

A level playing field?

For those who are well funded, the market conditions of 2023 could provide the ideal opportunity to secure assets that will produce income and capital growth for the long term.  There is no question that the levels of buying activity during the recent spell of historically low interest rates and inflation combined with positive rental growth had radically lowered property investment yields.  With the funds having largely withdrawn from certain sectors of the market, and a good pinch of understandable caution from those who have been aggressively acquiring in the market over the past 3-5 years, arguably there is a more level playing field for private investors, SIPP purchasers and those seeking buildings for owner occupation than has been the case for some years.