The UK real estate landscape holds firm through 2023
The year 2022 was a challenging one for the UK real estate sector. In the first quarter of 2023, things were shaping up well, all things considered, and confidence in the sector seemed to be recovering from the dents inflicted on it last year. Whether that trend continues beyond the time of publication in July 2023 is debatable.
UK real estate overview
According to JLL’s February 2023 data,* investment volumes fell to £48.7 billion in 2022, which was 8% below the ten-year average. Despite overall UK investment slowing down, investment in the UK real estate market from abroad remained strong, accounting for 52% of transaction volumes in 2022. Asia-Pacific and the Americas were the most active, each providing 14% of the total investment of £48.7 billion. This interest from international investors was caused by the weakened sterling after the government’s mini-budget in September 2022.
A closer look at JLL’s data shows 2022 starting strongly for UK real estate investment with £16.6 billion being transacted in Q1, followed by moderate performance at £13.4 billion and £11.3 billion in Q2 and Q3 respectively, before dipping to £7.1 billion in Q4. This incremental reduction is a result of the gradual fall in investor confidence and the mini-budget with its subsequent fallout in September and October.
The figures show that Central London took the lion’s share of UK real estate’s investment at £12.8 billion, with Outer London receiving £7.1 billion. While these numbers are down on the ten-year average, by 28% and 29% respectively, there has been an increase in investment above the ten-year average in other corners of the UK. For example, Yorkshire and Humber, North East and South West increased by 51%, 23% and 12% respectively. Each region that has increased investment levels is driven by different sectors, such as logistics in Yorkshire and Humber and student accommodation in South West.
In February, JLL was expecting 2023 to be a buoyant year for the UK real estate market. It forecast investment improving in the second half of the year because of the anticipated stabilising inflation and interest rates, improving investment sentiment and activity. However, the situation has turned out differently and the real estate market is not as lively as projected. With core inflation remaining high, the Bank of England base rate has been rising significantly throughout 2023. Now at 5%, it is the highest rate since 2008 – where many expected it to peak – with further rises imminent.
Comment from Guy Richardson
Despite all the challenges the UK real estate sector is facing, I think the UK, and London in particular, continues to be a trusted place to store capital. I expect more investment from Asia-Pacific, especially Singapore and Hong Kong, and the Middle East. Additionally, and perhaps surprisingly, there is data to suggest mainland Europe, especially Germany, will look to the UK for investment opportunities.
While I expect London to continue to lead the way in foreign investment in real estate, the increased investment volumes in the UK’s regions show significant opportunities beyond the capital.
It will be interesting to see how the second half of 2023 plays out against renewed predictions. It seems unlikely things will work out as predicted at the start of the year. Values have certainly been dropping, as there are fewer debt-backed deals to be done. However, there continues to be opportunity aplenty for cash-rich investors. Even the seemingly troubled sectors like retail have been seeing a lot of interest as investors look to predict the bottom. In other words, yes things are tough right now but where there are challenges, there are always opportunities.
*All JLL statistics are from Total UK investment volumes reached 48.7bn for 2022