Share Prices & Company Research


10 March 2023

A Forward Outlook on the UK Property Market

The UK has a fascination with property; homeownership continues to be a widespread aspiration and an investment property portfolio is widely seen as a route to wealth. With inflation higher, but cooling, and interest rates set to climb further and peak in 2023, the future path of property prices is a frequent discussion topic. Alongside their own home, many also invest in property either directly or through an investment product, be it a Real Estate Investment Trust (REIT) or commingled investment fund. With multiple markets coming under the property banner, the sector and location are key considerations underpinning future returns. Four sectors are up for discussion, each with their own characteristics, outlooks, and legislation to consider.
The Private Rental Sector (PRS) is the one most will deal with in their lifetime. The sector currently has a chronic supply problem which, when combined with rising costs of borrowing for landlords and high house price to median income ratios, provides a tailwind for strong rental growth going forward. Throw into the mix new government legislation requiring a minimum Energy Performance Certificate (EPC) rating of C or above by 2025, and the supply issue is likely to worsen. Marrying the increased demand for rental properties at the hands of higher mortgage rates and squeezed incomes with supply constraints, rental growth figures are likely to remain strong for the foreseeable future. Having been in the pipeline for some time, institutional investors are drawn to the sector, seeking to capture the returns on offer from ‘generation rent’ with housing estates of high-grade properties or top end city centre apartment blocks.
Industrials have been the darling sector in recent years with the tailwinds of urbanisation and e-commerce driving capital values. In no subsector has this been more noticeable than within Big Box warehousing, where vacancy rates remain low and supply is constrained on the back of limited land availability and a time-consuming planning process. With demand outstripping supply, capital values soared, compressing rental yields from the 6% range in 2012 to around 3.5% in mid-2022. Asset management opportunities are limited for what are essentially giant sheds, resulting in the Big Box sub-sector story being one of capital growth as opposed to rental growth. In 2023, the trends look set to persist. Vacancy rates remain low, demand outstrips supply and development pipelines continue to be pre-let, with rising input costs being assumed through increased rents.
The UK’s office market varies greatly across regions. In London it is a tale of two cities, with a recent research meeting with Derwent London highlighting the relative underperformance of the City of London and Canary Wharf in relation to the areas around Fitzrovia and the tech belt running from Kings Cross to the Old Street roundabout. Similarly to PRS, regulations are set to impact the UK’s office market. Minimum Energy Efficiency Standards (MEES) regulations require a minimum EPC rating of B by 2030, resulting in an estimated 80% of London’s stock requiring an upgrade. Add heightened demand for higher quality office space from companies to attract talent and meet sustainability goals, and the future for prime London office space looks strong.
Retail has been the more volatile sector, battling the headwinds of a shift to online retailing and multiple COVID-19 lockdowns through 2020 and 2021. More recent challenges remain, with the rising cost of energy and inflation limiting consumer discretionary spend. Amidst the difficulties, retailers have been consolidating their real estate, closing underperforming stores in a bid to save costs. A bone was thrown in the Autumn Budget with the most generous in-year business rates relief package for nearly 30 years, outside the COVID-19 relief package. While helpful, the outlook for retail remains challenging, with consumer expenditure and input cost inflation two important metrics for overall retail performance.
The most common access point for individual investors remains the REIT, with a wide offering across specialist sectors and diversified portfolios. The aftermath of September’s mini budget sent share prices sharply lower, with higher government bond yields signalling the widening of underlying portfolio yields and expected drop-off in net asset values. Both internal calculations and research team discussions with company managements conclude the share price declines indicate wider investment yield shifts than may reasonably be expected. As a result, there looks to be value on offer both in the underlying property markets and the REIT structures. While positive, there could prove to be stumbling blocks should the sector and geography be out of favour.

This article was taken from the Winter 2023 issue of 1875. To subscribe to our investment publications, please visit
A Forward Outlook on the UK Property Market

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