Economic Uncertainty Is Driving A Return To Safe Investment Havens Across The UK

Economic and political instability is causing a renewed flight to safety among investors. Most strikingly, the living sectors are becoming increasingly favourable for investment. These are the headline findings of RSM UK’s annual Real Estate 360 survey, which questions property experts across the UK.

“The most significant aspect of the report is the difference between this year and 12 months ago,” RSM UK's Head of Real Estate and Construction Stacy Eden said. “The barriers to investment have changed entirely. One to two years ago it was the pandemic, before that it was Brexit, possibly the UK tax and planning system or business rates. This year the impact of economic uncertainty and political instability is really high.”

It is clear from the results that respondents feel the real estate sector is tough right now. Although the economic outlook has brightened since the survey took place in November 2022, respondents reported a turbulent funding landscape that has yet to ease, Eden said. 

“Is it more difficult to access funding right now?” he said. “The answer generally is yes. People are expecting it to continue to be quite difficult throughout 2023. There’s still nervousness about prices so lenders are being cautious.”

However, RSM UK economist Tom Pugh said that the financial landscape for the coming year is unlikely to be as tough as previously imagined. 

“Liquidity is still pretty strong,” he said. “If you can afford 5% and you have a credible business plan then you can get funding, unlike during the Global Financial Crisis. It might be more expensive than it was a couple of years ago, but opportunities are there.”

This is evidenced in the survey results, Pugh said. While 47% of respondents said that over the last 12 months, access to funding has been more difficult, not everyone agreed. This result is not much greater than the combined result of those who believe it has been easier to access funding — 3% — and those who believe it has been about the same  — 42%. 

“In real estate there is a clear split,” Eden said. “There are successful businesses that are gearing with appropriate funding and able to refinance. In contrast businesses that were overstretched, perhaps relying on interest rates and heavy funding, are more likely to be speaking to our restructuring team.”

Whether or not funding is harder to access, 60% of respondents said they are changing some of their business plans as a result of interest rates and inflation. A further 20% said they’re changing most of their business plans. 

The survey results also indicated a return to pre-pandemic trends, such as investing in the South East and London for residential above other regions.

“When you have economic uncertainty, people move towards a safe haven,” Eden said. “This explains an increased interest in London residential. There’s been talk recently of the return of apartments compared to houses as people move back to city centres. Flats often present a more affordable option than houses and people are also keen to be closer to leisure and hospitality.”

Eden cited the underlying supply-demand imbalance across the UK as a main factor driving this strong appetite for residential. The UK has an underdeveloped senior living sector, while there continues to be demand for student accommodation. Nineteen percent of respondents predicted an increase in student housing investment, up from 6% in 2022. 

The section of RSM’s survey that focused on environment, social and governance highlighted the challenges the industry is facing to reduce carbon emissions. When respondents were asked what they consider to be the biggest barrier to decarbonisation, there was a fairly even spread across all options. 

“This is understandable because ESG is a complex subject and there is a lot for people to understand,” Eden said. “Large organisations might have made progress, but for many organisations that landscape is changing so quickly that they feel left behind.”

However, 41% of respondents said that the UK is effectively developing and implementing ESG policies, while 40% said they had a formal plan to address their commitments. Respondents indicated that access to finance is increasingly being aligned with ESG factors. 

Overall, the survey results highlighted the challenges that commercial real estate faced at the start of 2023. However, there is a general feeling that the global economic outlook has already started to lift, Pugh said. While the UK interest rate is likely to rise again in 2023, it could reduce to a new normal of about 3% in the next five years. 

“Barring any further unforeseen geopolitical events, inflation is likely to be 2-3% by the end of the year,” Pugh said. “Interest rates will take longer to fall, partly because the labour market is very tight. The UK has lost a lot of working people due to sickness and early retirement, and the Bank of England is going to have to work harder to drive employment up and slow wage growth.”

Read RSM's UK full Real Estate 360 survey report. 

This article was produced in collaboration between RSM UK and Studio B. Bisnow news staff was not involved in the production of this content.

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