Jo Cowen of Jo Cowen Architects on the Viability Crisis of 2023

Last year saw unprecedented macro geopolitical and economic uncertainty, rampant global inflation, war in the Ukraine and a humanitarian crisis in Afghanistan.

Further acceleration of deglobalisation, peaks in global energy and food prices alongside major supply side issues has resulted in one-third of the world moving into an effective recession, with global GDP for 2023 estimated at just over 1%.

What has been the direct impact of these trends and events on the UK property market? Not helped buy our own political instability and catalysed by former prime minister Liz Truss’s fiscal policy, we are teetering on the brink of recession.

Both US and local economic confidence is low, labour shortage is acute, inflation has impacted each and every one of us and a sustained economic slump has been rallied by all. Without doubt this is one of the most challenging environments for developers and architects since the global financial crisis.

The difference is that this is not a liquidity crisis within the real estate sectors - it’s a viability crisis, particularly in the living sectors, where ESG and the delivery of long-lasting quality assets are paramount. The combination of unprecedented build cost inflation of 20% to 30%, supply chain issues, softening in yields, and lack of confidence in valuations, has rendered most developments unviable. As architects, we are working with investors and developers that are struggling to fund and progress transactions and sites.

While transactions have decreased significantly in Q4 2022, the perceived speed of pricing adjustments has surprised the market. The UK real estate market is largely dominated by global institutional investors, lagging adjustments in the US and Europe. The living sectors have been profoundly affected, although UK pricing expectations and sentiment has moved more markedly in the commercial sectors.

“It is likely that significant developments are not going to be delivered to the quality they were originally envisioned to have.”

The alternative asset classes have never been more relevant and in need. You can not digitise a bed; in a recession, everything else goes before your home, be it for sale or rent. Combined with higher interest rates, the prevailing demand for property to rent will only increase.

While there was still a strong uplift in rents last year, I do not believe they will continue to rise in line with inflation. Yet rising demand for well-designed, located, serviced and professionally managed multi-family homes and single-family homes means these assets are likely to perform strongly from an operational perspective. Yields have most likely moved out by up to 50 bps on prime proeprty, but appraisals are being stretched further through interest costs, build-cost inflation and softening of yields. And so, significant regeneration schemes that were due to start have stalled as we try to work out a way to deliver high-quality schemes.

What are the solutions? To redesign, retender, or alue engineer that which is already engineered? Or wait and watch the market to see a recovery in yields? It is likely that significant developments are not going to be delivered to the quality they were originally envisioned to have. There are few areas where we are not forced to consider reducing costs further, and there rests the dichotomy. Our environmental targets are under threat, and this poses issues for all. But where is the balance between reduced quality development and the future impact on rents and capital values?

We are facing these issues every day as architects. It is our role - and always has been - to innovatively design beautiful places and functional, deliverable regeneration schemes that are residents wish to live in and that perform for our clients. Never more have we needed to take a long-term view, remain calm, and navigate this together as a industry.

Jo Cowen is chief executive of Jo Cowen Architects