After the second half of 2022 saw a fast market correction and a recalibration of core real estate assets in London, what does that mean for investment appetite and financing in 2023?
Fergus Keane, Head of Central London Investment Markets, points to more certainty in the market:
“There’s an incredible amount of global equity lining up to get back into London this year now there seems to be more direction of travel and getting on top of inflation.”
But this won’t translate immediately with a low volume of transactions and smaller lot sizes in the first half of the year. “I think that will grow as we move through the year and some of the bigger players come back to the market,” he adds.
Richard Choi, Head of Real Estate Advisory, BNP Paribas, points out the market is in a different place compared to the financial crash in 2008. He says: “Not only are the banks well capitalised, but we have tremendous amounts of equity raised for deployment in the real estate sector.”
He adds that clients are in the process of reviewing the depth of the market change and how they adjust their business plans accordingly. With Q3 will come more certainty and a more active market.
The exchange rate won’t be as strong a factor in driving interest in buying real estate in the UK, but it will still be a factor, says Choi. Meanwhile, the Asian market has had some challenges but is opening up again, and he describes the Middle East market as “frothy” on the back of the energy crisis.
Fiona Voon, Head of Real Estate Capital Markets UK, BNP Paribas, also points to signs of more liquidity in the market: “Lenders, we are hearing, have got fresh budgets, fresh allocations... So, for core assets, with good sponsorship, we're still seeing some very competitive bids.”
However, the caveat to that is underwriting larger deals remains “tricky”, she says, which means more investors clubbing together. A market silver lining also comes from limited sign of forced sales thus far; loan-to-value ratios are lower than at the time of the financial crash.
So if there are signs of money looking for a home, what types of assets will be on the radar?
Daniel McHugh, Chief Investment Officer, Real Assets, Aviva Investors, says City of London offices and the residential sector are both areas where the business currently sees long-term value.
He adds: “We believe for the very best, you will see significant outperformance there.”
For residential, he explains, the focus is on single-family housing: “Again, the macro drivers all point to growth which is likely to exceed that of other sectors.”
Choi tags alternatives as the big theme for 2023: “Whether it's life sciences, data centres, the living space and anything that's related, it tends to be a sector that's quite resilient and where I'm seeing a lot of investment activity.”
Aside from West End offices being on the radar of Middle East and Singapore investors, Keane also puts the spotlight on Central London mass market retail on Oxford Street. “When you can buy the street off early 00s yields and early 00s rents, it sounds very interesting to me,” he says, as a recovery story for the street post COVID-19/crossrail department store getting repurposed.
Sustainability may drive some assets to the market, particularly as changes to minimum energy performance standards (MEES) come into effect in April. If owners of poor-performing assets don’t have the appetite or capital to make the necessary upgrades, Keane believes they may decide to “just cash out”.
The market is in a different place now compared to when it was last facing a recession; there are different challenges but also different drivers and opportunities.
Fergus Keane, Richard Choi, Fiona Voon and Daniel McHugh were speaking at BNP Paribas Real Estate UK’s Capitalise event.
