A strengthening labor market and a growing economy will provide a positive backdrop for real estate in 2022, with total returns on all UK property expected to be slightly higher than 6%. According to CBRE, a global real estate advisor, the UK Real Estate Outlook was released today.
Rising Covid-19 cases, including the new Omicron variant, as well as supply bottlenecks and rising energy prices, are the main risks to the pace of recovery and the inflation outlook in the short term. Consumers, on the other hand, may spend their savings faster than expected, boosting consumption growth.
The Effects of ESG
The ESG agenda will remain a priority for the property industry, with the tightening of regulation across the UK set to continue as governments strive to meet ‘net zero’ emissions targets. The main strategic drivers of change will be the new Heat & Buildings Strategy, the UK Green Taxonomy, and the Sustainability disclosure Requirements.
Demand for more precise and rigorous valuation of sustainability features will increase in 2022 as investors seek to identify buildings that deserve a “green premium” and avoid those that deserve a “brown discount.”
Because of healthy job growth and the release of pent-up demand, office take-up will return to historical levels in 2022. With more flexible working patterns, the hybrid working model, and the need to bring people back to the office, occupiers will need to focus more on creating outstanding ‘work experiences’ through integrated space, technology, and service.
The demand for UK investment stock remains strong. Private investors account for the lion’s share of demand, implying that core assets will continue to be in high demand. The gradual relaxation of travel restrictions will lower the barriers to entry for many foreign investors, and as a result, CBRE predicts that UK office investment volumes will increase by approximately 20% year on year in 2022.
CBRE predicts that the UK logistics market will remain strong, with rental growth expected to continue in all UK regions through 2022, despite Scotland still lagging behind the rest of the UK. Because of the significant demand and supply imbalance, developers and investors will continue to be in high demand.
However, the market faces challenges such as planning, labor availability, rising construction costs, and pressure to address sustainability and carbon reduction issues as part of developers’ specification proposals.
The retail sector is already on the mend, and CBRE expects it to stay that way, aided by the highest levels of savings on record amassed during the pandemic. Investors will continue to re-engage with the sector as a result of the rebasing of rental and capital values, notably in Scotland, where the Retail market has long been a bad relation.
While the market is still recovering, downside risks such as future COVID-19 outbreaks, global supply chain disruptions, and consumer price inflation remain. Town center regeneration continues to be one of the most difficult challenges for local and national governments, as well as landlords.
During the epidemic, the residential market has remained resilient, and CBRE predicts that this will continue till 2022. With a strong return on investment, interest is expanding beyond traditional multi-family housing to include single-family housing, co-living, and affordable housing.
Despite its overall strength, Build to Rent (BtR) investment was lower than expected in 2021. Travel restrictions and rising construction costs hampered deals, limiting the ability to transact on forward funds. As these impediments are removed, the strong underlying sentiment will result in an increase in activity. This will be aided by favourable debt markets, as diversifying lenders increase their residential allocations.According to CBRE, BtR investment will grow by around 65 percent in 2022, with the emergence of more suburban BtR locations, while overall residential investment will grow by 10 percent.
Co-living will also have a strong year in 2022, thanks to the return to the office and renewed business travel. Investors, operators, and tenants alike are drawn to co-living schemes’ ESG attributes, such as combating loneliness – the sense of community that co-living fosters.
Operators in various sub-markets of the hospitality and leisure industry are in varying phases of recovery, and optimism is growing. There is a capital barrier in place for a sector where demand for operating platforms outnumbers supply. In each sub-sector, the visibility of the recovery and understanding of future performance will continue to be crucial indicators of investment appetite and pricing. Investors who can predict the recovery ahead of time will benefit from both trading and pricing improvements.
CBRE forecasts record M&A activity across operational real estate sectors, notably leisure and pubs, as the majority of industries recover from the epidemic.
“In Scotland, the real estate markets were perhaps a little later in opening up in 2021 relative to the rest of the UK,” says Miller Mathieson, managing director of CBRE Scotland. However, I am confident that activity in the second half of the year indicates strong investor appetite across all sectors, which will result in a return to normal levels in 2022. There are several large transactions scheduled to close before the end of the year that are good indicators of this. While the challenges of the previous year have not yet been overcome, with the Omicron variant of Covid posing new uncertainties, the property industry can still look forward to 2022 with renewed optimism. Real estate has a real impetus for growth in 2022, thanks to a growing economy.
Occupants and developers in all real estate sectors are focusing on green buildings, and it is clear that sustainability is also playing a growing role in investor strategy.