More than 400 clients gathered online and in the West End on January 24th for ‘Capitalise’, our annual gathering of commercial real estate (CRE) experts. We hold the event in January because it’s a good time to make predictions, both about the year ahead and beyond.
The two-hour session was packed with insights, and below I have tried to condense them all into a four-minute read spanning my five key takeaways. I look forward to exploring these themes in more detail with you as the year progresses.
1. A brighter outlook in a volatile world
Most economies escaped 2023 in better shape than analysts had anticipated, and investors are now preparing for a global, coordinated loosening of monetary policy. In the UK, the headline rate of inflation will drop below the 2% target in the second quarter and from back end of H1 2024 we can expect the base rate to begin a gradual glide down to reach 3% by end of 2025, according to forecasts shared by Matthew Swannell, Economist at BNP Paribas CIB.
Geopolitics presents the big unknown. As we heard from Ben Page, CEO at Ipsos, about four billion people will vote in elections this year. Roughly 140 conflicts are underway. The US election looms large, especially if a Trump government opts for a more isolationist approach, which could place strain on our evidently vulnerable supply chains.
Nevertheless, the easing of the all-consuming inflation story will give real estate investors a chance to begin addressing more challenging long-term issues. Emmanuelle Bury, UK Country Head for BNP Paribas, drew our attention to the Basel III regulations that will soon require banks to have adequate capital relative to the quality of underlying assets. Indeed, this story of quality will increasingly dictate where banks direct capital, particularly as lenders consider the proliferating risks presented by the climate and the expanding web of regulations designed to protect it.
2. Total returns recover, but where is the core capital?
CRE investors agree that 2024 will be a year of higher returns, but beyond that views diverge. Investors expect total returns across all CRE sectors to come as high as 8.4% and as low as 0.4%, according to latest IPF Consensus Forecasts. We consider ourselves relatively bullish, with a forecast of 6.7% for All Property total returns.
This uncertainty is particularly apparent in the offices sector. Investors expect total returns to range from as high as 5%, and as low as -6.6%, and again we are fairly bullish at 4.1%. The divergence is understandable, given some of the big questions that remain unresolved, like the degree to which we see a return of core capital to the UK market.
In the absence of that capital, the composition of investors is changing, noted Richard Choi, Head of UK Real Estate Advisory at BNP Paribas UK. Last year, we saw less distress than many had anticipated in favour of more selective, structured transactions. Asian investors played an outsized role, as did value-add capital.
Overseas investors accounted for almost 50% of UK investment volumes in 2023 and Argie Taylor, our Head of International Investment Group, BNP Paribas Real Estate UK, expects another bumper year for overseas capital. Investors will still seek out the greenest buildings in the best locations, provided the price is right. Investors from Asia will continue to be hyper-focussed on how the numbers stack up, while their European counterparts will add increasing weight to the qualitative aspects of the ESG story.
3. The challenge of a creaking planning system
The opportunity for capital-rich developers is growing every day. Grosvenor’s conviction in best-in-class offices has only solidified since the outbreak of Covid-19, and not just within the landlord’s enviable Mayfair and Belgravia patch. The company has loaded up on 500,000 square foot of regional office space across four cities since 2020, Grosvenor Executive Director of Investment Rachel Dickie explained.
The company isn’t reliant on debt, so plans to capitalise on the dearth of development by delivering 365,000 square feet at Mayfair’s South Molton Triangle in 2027 – when we expect completions to running about 31% below the five-year average. The onus on sustainability will remain at the fore – its illustrative that Grosvenor’s sustainability team has grown from one to 12 people in four years – and the importance of refurbish our existing stock is now paramount.
Aside from the funding, planning remains the big challenge to progress. This isn’t just about greening our existing stock either, much will have to be converted to new uses if we are to maintain vibrant, growing cities, said Caroline McDade, our National Head of Planning. This will be the year that we begin to find answers as to which alternative uses are most feasible for our underutilised offices, though the answers will often depend on the viability presented by geography. The outlook for stock in well-connected southern towns, for example, where there is seemingly insatiable demand for lab space, looks like an easier sell than properties spread across much of the north.
4. A population on the limit
Our healthcare system is trying to tell us something, and I tried to use my presentation to coax that message out. The median NHS England wait time now stands at 14.4 weeks, nearly double the pre-Covid average. The pandemic prompted a sharp increase in long-term sickness globally, resulting in nearly £7 trillion loss in productivity due to low worker engagement.
There are signals here for real estate investors. Our health care infrastructure and real estate is under severe strain, and it’s only going to increase as our population ages: the fact that 2023 was the first year that the over-65 population outnumbered under-15s demonstrates in England & Wales shows how badly we need better housing provision and healthcare infrastructure for the elderly.
But there are other clues here for business leaders, perhaps most nearly summed up by Ipsos’s Mr Page when he shared data showing that 62% of people in the UK agree with the phrase “I wish I could slow down the pace of my life”, up from 42% a decade ago. People of all ages feel that their life is too complicated and fast-paced, companies that focus too much on squeezing productivity and not enough on the social aspects of our lives do so at their peril.
5. New ways of living emerge
Will Artificial Intelligence be our saving grace? Perhaps. Much has been made of the productivity-boosting possibilities, but you can flip that story and say it might also relieve some pressures and boost leisure time, all without productivity losses.
It’s still too early to tell, of course, and we’ll know more when leaders really begin getting to grips with the technology – 79% of business leaders have used or tried out AI at least once, according to Ipsos, yet just 7% of the population are using it regularly. Excitement is outpacing adoption.
In the absence of this technological revolution, workers appear to have noticed the benefits of proximity to their colleagues. Four-in-ten workers are now in the office five days a week, while 45% are spread across one day to four days in the office, the Ipsos research shows. Eleven percent of workers say they want to spend more time at their employer’s location than they do already, while more than half say they will spend more time working at the office than at home during 2024. Indeed, employers are earning their employees commute and new working patterns are beginning to look a little like old days.
If you’d like to explore these themes in more detail, you can reach me via the contact form
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