As part of its forecasts for the year ahead, JLL has highlighted that the stabilisation of inflation and interest rates will prompt more investment activity in H2 2023.
Investment volumes for 2022 reached £48.6bn in 2022, a 22% decline on 2021 volumes of £62.7bn, and 8% below the 10-year average of £53.1bn according to JLL.
Looking towards capital flows for the year ahead, JLL has predicted that activity will improve in the second half of the year and that the focus will gradually move from yield shifts to income resilience – in particular occupational risks and the divergent potential for rental growth. It is expected that activity will be orientated towards core assets where rental income is regarded as most secure.
Regarding sources of capital targeting UK real estate, Asia-Pacific buyers, particularly those from Singapore and Hong Kong are anticipated to represent an elevated proportion of buyers in 2023 compared to recent years. German buyers will also re-emerge as opportunities arise. The huge, energy-driven flows of capital into Middle Eastern Sovereign Wealth Funds could mean they become major players as the year progresses.
JLL cited that occupiers are set to seek partnerships with landlords in order to achieve their goals and reconcile increasing costs with their ambitions to transform and upgrade their real estate in 2023. There will also be an increasing appetite in areas such as life sciences for partnerships with investors, developers, local authorities and educational and research institutions – which will help drive forward regeneration.
Leasing markets will see polarisation and pockets of rental growth according to JLL, with rents most buoyant in the ‘super-prime’ segments. Occupier demand for offices will focus on high quality space with superb sustainability and design credentials – which means investors will too. This is expected to highlight major obsolescence problem in the secondary market as rental growth continues to polarise. Whilst in industrial it will remain a landlord’s market; the imbalance of supply and demand, particularly in the mid-box and urban logistics sectors, will mean we will see relatively resilient rents. The only complication in this picture is the business rates revaluation which will bring instant benefits for the winners – mostly those in the retail sector – and a slower ratcheting of costs for subsectors that have seen recent rental growth.
Jon Neale, head of UK research at JLL, said: “2023 is going be a difficult year for many businesses, but there will be some tentative evidence of green shoots in the second half, particularly in the core investment market. But if companies solely focus on survival, rather than on longer-term trends, they will struggle; the pressures that have begun to emerge during the last cycle – sustainability, urbanisation, greater occupier selectivity and more demanding requirements – will only intensify in the next one. The polarisation that has been seen over the past few years will intensify over 2023, but that may just be the start.”
Stuart Smith, director, JLL in the Midlands, said: “Make no bones about it, 2023 will be challenging for the Midlands’ real estate market. But it will also present some fantastic opportunities and it is more than able to bounce back convincingly – a mix of great transport links, proximity to London and thriving business and student communities make it an attractive place for foreign direct investment, which will prove a catalyst for recovery.
“A renewed focus on the Midlands across all sectors in the region’s major cities and their surrounding areas, make it ripe for a fast recovery when inflation eases and interest rates return to normal.”
Stephanie Hyde, Chief Executive, JLL UK, added: “Despite the ongoing headwinds, the majority of investors and corporates alike have set clear objectives and targets for decarbonising buildings, and 2023 will be the year in which these ambitions turn into actions. Small and medium sized businesses will also start to develop and implement sustainability strategies en masse, spurred by the mounting evidence of the financial, social and environmental returns. However, given cost pressures it will become clear that increased tenant and landlord collaboration – through engagement as well as financing – is imperative to making progress possible.
“Reinvention and repurposing will be a major theme of development in 2023, even if immediate activity is constrained by economic conditions. Investors have been watching the retail sector for some time, and values have now reached a point where large-scale reimagining is possible. There will be generational opportunities in this sector.
“The levelling up agenda may falter given economic conditions but the underlying drivers behind it will intensify. The significant role that private sector partners play in delivering regeneration projects will be all the clearer as local councils see revenues fall and look to maximise the economic and regenerative potential of the assets that they own.”
