Investec Real Estate has released its second Future Property report, revealing that private clients with UK real estate are now more optimistic than they were two years ago. This report, which includes data from 110 high-net-worth individuals and entrepreneurs with a combined net worth exceeding £6bn ($7.6bn), indicates that rising interest rates are unlikely to deter investors.
There has been a notable increase in investment activity, particularly in the residential for rent and purpose-built student accommodation sectors since 2022. Development activity has surged significantly: 23 percentage points for industrial, 16 percentage points for residential, and 13 percentage points for office spaces. According to 64% of respondents, UK real estate capital values are currently at or near their lowest point, making it an opportune time for investment. Furthermore, when it comes to building or investing in real estate, 42% of respondents prioritise social impact over environmental issues, with only 16% considering environmental concerns as more significant.
Despite an unparalleled period of macroeconomic turbulence, private clients with exposure to UK real estate show more positivity now compared to two years ago. Investors have increased their involvement in UK real estate, even amid the higher interest rate environment of the past 18 months. The report highlights a significant recovery for the office sector, which underscores the value-add skills of private clients and the repricing of assets. Offices have climbed in investment preference, now ranking third compared to seventh in 2022, with 35% of respondents choosing offices in 2024 versus 23% in 2022.
Over the past two years, investment in various asset classes has risen, with 72% of respondents expressing optimism about the UK real estate market. London continues to be the most appealing city for investment. However, despite increased investment in the office, retail, and industrial sectors, 62% of respondents still view land costs as the largest barrier to investment. Higher interest rates have driven investors towards residential real estate for both sale and rental income, with 96% of all investments being directed into these asset classes, with purpose-built student accommodation being the most popular choice.
Developers’ approaches have shifted dramatically in response to the unpredictable environment, with a focus on quality increasing from 13% in 2022 to 33% this year. This shift highlights a flight to quality amidst market volatility. The survey also shows a distinct change in focus from environmental concerns to social impact within the ESG framework. While 42% of respondents consider social impact the most important ESG aspect in real estate investment, only 16% prioritise the carbon footprint. Nonetheless, reducing the environmental impact remains crucial, with 80% of respondents stating that minimum energy efficiency standards should be a legislative priority.
Shivani Goolab, head of private client real estate at Investec, stated that the latest report presents a compelling case for UK real estate, highlighting a shift in sentiment from resilience against a volatile environment to one poised for increased activity. Despite existing challenges, strong total return performance is expected, driven by supply and demand dynamics in various sectors, particularly residential. The enduring appeal of the UK, asset repricing, and an improving economic backdrop contribute to this positive outlook.
Respondents are more optimistic about the current investment landscape compared to 2022, and they believe that the outlook will further improve following the upcoming General Election and anticipated interest rate cuts. This is expected to lead to higher activity levels and improved returns across all sectors. The report also reveals a major rebound for the office sector and growing opportunities for development, particularly in repurposing older office assets. There is high competition for creating prime office space and a clear appetite for repositioning good value secondary or tertiary office spaces, or underutilised retail spaces, primarily into residential properties.
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