We have published our second annual Real Estate Sentiment Index, obtaining the views and insights of approximately 100 business leaders, investors and professional advisers in the real estate sector, spread across every region of the UK.
In addition, we interviewed three high-profile key decision makers in the industry, to get their current views of the market, and what the future may entail for the sector.
We have seen a significant amount of change in the world over the last couple of years, with rising geo-political uncertainty and surging energy prices reverberating across Europe, the UK and beyond, contributing to a challenging financial environment driven by inflationary trends and the reversal of a long-term period of historically low interest rates.
Higher prices, and a higher cost of debt – not least mortgage interest rates – have also hit hard and fast.
The real estate sector has not been immune from these seismic shocks.
It was no surprise to see ‘access to finance’ surge as an area of concern for our survey respondents, though it is probably better to think of that as ‘access to affordable finance’.
With consumers having less spending power than even a year ago, and continued issues with UK government policy on planning and other housebuilding related issues, there is a risk of the market stalling, with many developers slowing down on delivery as reservation levels slow or fall. But 2023 is likely to be a year of two halves.
After an initial period of stagnation as the industry took stock and re-budgeted, activity across the investment market has shown recent signs of improvement – perhaps this is a sign of interest rate stability returning, albeit at a higher rate than we have seen for the past 15 years.
Developers and investors are ‘pricing in’ the new financial reality, with schemes now being revisited– albeit with new definitions of what is achievable and what level of returns can be expected.
At the same time, there is a clear drive towards more energy efficiency and sustainable operations and supply chains. The energy price crisis has cast this into sharp relief, with reliance on overseas fossil fuels a clear political and business risk and resulting in accelerating demand for domestic renewables. The real estate industry is responding to this. It must. But it will take time and investment, as well as government support. Retrofitting remains an important topic both for the residential market and the office market and it remains to be seen whether the government’s tax incentives, including capital allowances and a temporary zero-rate of VAT for the installation of energy saving materials in residential properties, will have the required stimulating effect.
In this context, it is no wonder that confidence levels have ebbed. But amid the challenges there have been, and continue to be, real success stories and areas of exciting innovation and development – which fills me, and the rest of the team at Saffery, with real optimism for the future.
Our key findings include:
- Overall confidence has weakened in comparison to 2022. This is resulting in a significant adjustment to asset pricing, which is likely to cause near term challenges. However, latent investor demand and a continued shortage of stock in the UK is likely to see a recovery towards the end of 2023 as a revised pricing paradigm emerges.
- Increasing profitability remains top of the list of priorities for the industry (59%) as operators continue to protect against economic and inflationary headwinds.
- 85% of respondents are concerned about the domestic political and economic environment, mirroring the disruption in Westminster in the latter half of 2022.
- Fuel and energy costs (69%), access to finance (65%), the international political and economic environment (64%) and the general cost of doing business (62%) make up the remaining top five challenges.
- Just 26% of respondents are predicting increased activity in core sectors in their regions in 2023, a marked drop from 2022 (41%). While only 19% were predicting activity decreases last year, that has grown to 34% this year – mirroring the decline in overall industry confidence at the end of 2022.
- Residential (across all tenure and asset types) is still expected to drive the most growth, but in contrast to 2022, there were no sectors in which the majority of survey respondents were predicting an overall increase in activity, signifying potential stagnation.
- Skills and training was cited most often by respondents as an area of planned investment (75%), however carbon reduction and climate change was cited most frequently as either critically important or more important than most other issues.
- 73% of respondents are planning to integrate ESG performance criteria into developments, investments and projects over the next 12 months, broadly similar to last year. However a larger proportion of respondents (45% vs 38% in 2022) reported that they would always be using such criteria.
- None of our respondents are currently operating at net zero, however almost three quarters (73%) are firmly on the journey, having either committed to net zero itself or other climate related targets.
- The financial implications of climate change and the associated measures to mitigate and manage its effects continues to weigh on the industry, with almost two thirds of our respondents saying that it is having either an immediate or future financial impact on their business (60% and 61% respectively).
We hope you find our report interesting and insightful. Please get in touch if you would like to discuss any of the findings in more details.