UK commercial real estate has seen a sharp correction in prices over the last nine months. Capital values began to fall last summer and are now 21% below their peak in June 2022. That is the sharpest correction since the period immediately following Lehman Brothers failure in 2008.
The UK real estate market is experiencing a resurgence of interest from international investors. According to the latest INREV intentions survey in January, the UK ranks second in popularity among Asian, Middle Eastern, and North American investors targeting Europe, and third among European investors.
1. Implications for real estate – a year of two halves?
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If the consensus on inflation and interest rates is correct, then there is a strong possibility that capital values will find a floor over the summer, 25-30% below their peak in June 2022.We expect that rental values will be broadly flat at the all-property level through 2023-2024. This year’s recession is forecast to be relatively mild and there is little risk of an over-supply of new space hitting the market at the wrong time. For example, the total amount of office space in central London will only grow by 1-2% between 2022-2024. This compares with 5% during the global financial crisis (GFC) and 13% during the recession of the early 1990s.
2. What is the biggest opportunity for growth in the Property Management Services industry in the UK?
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The industry relies on rented residential properties in the UK, as a large bulk of revenue is associated with residential rental property management services. Demand from rented residential properties trends opposite the number of residential property transactions. A rise in residential property transactions typically indicates more first-time buyers getting on the property ladder and ramps up home ownership, hitting demand for residential management services. The number of residential property transactions is falling in 2022-23, providing a potential opportunity for property managers.
By embracing digital innovations, automation, and advanced analytics, property management companies can enhance operational efficiency, deliver better customer experiences, and make informed strategic decisions. Embracing technology will enable them to streamline processes, optimize maintenance operations, and offer personalized services, ultimately attracting more clients and gaining a competitive edge in the market.
Several factors are aligning to support a recovery in investor demand for UK real estate. Bond yields have stabilized post-pandemic, the UK real estate market has re-priced faster than others, and the currency (sterling) has become more stable. History has shown that previous recessions were followed by robust real estate performance. If UK inflation continues to decrease and the recession remains mild, investors are advised to consider deploying capital later this year.