Despite the volatility experienced within the property industry due to the uncertainty of the UKs political and economic status, this as an opportune moment to invest into UK real estate.
While the market is yet to see ‘panic selling’, funds are experiencing pressure to provide more liquidity due to consistent redemptions. In times of volatility, investors in retail funds, often withdraw, causing issues with these funds retaining assets, placing a need on them to sell. This was seen during the global financial crisis and immediately following the Brexit referendum.
Highly-levered assets that require refinancing, may present owners potential issues. Given the staggering increase in the cost of debt and the spectre of being unable to meet a certain interest rate cover ratio, owners are beginning to see banks not only increase rates, but also reduce loan to value (LTV), causing an equity bridging dilemma. Owners will either need to input more equity, take on different forms of leverage or face selling – presenting an opportunity for fast-moving purchasers.
The market is currently experiencing an interesting dislocation, which means investment into the UK real estate will be more affordable and accessible than it was six months ago.
From now into the new year, there will be fundamental opportunities to purchase real estate that was simply out of reach to family offices, international buyers and property companies earlier in 2022. Sectors that were ‘too hot’, are now ripe for acquisition, supported by strong occupational trends and a sense of resilience. Investors to buy sensibly, as they can now access prime opportunities across UK real estate at a less competitive price tag.
In the current market the same funds that were buying throughout the global financial crisis, and may have more recently been priced out, are being seen. In the last few weeks, there has also been a growth in joint venture structures, helping developers to benefit from rental growth during the construction period, as well as a likely more stable economic environment on practical completion.
Unlike other market downturns, the bulk of pension funds and private equity funds are well capitalised, having raised billions of pounds over the course of the last few years. Many of these funds were raised to target the ‘beds and sheds’ sectors, across industrial and logistics, student accommodation and build to rent.
Because of the rapid yield expansion in the industrial and logistics sector in recent months, as the fog of uncertainty clears, most capital will be pointing towards the living sectors. This, therefore, creates an opportunity to purchase assets, portfolios or land at this stage, before the funds re-enter meaningfully and decisively into a small number of sectors. These sectors are likely to remain appealing and counter-cyclical.
Furthermore, as end of year valuations approach for the funds, some will need to dispose of assets quietly and efficiently.
The trajectory of a number of sectors in the UK real estate marketplace is likely to be positive and now is the most interesting moment in a decade to purchase.
Jonathan Harris is founder of investment agency Harris Associates