For a market that has historically been cyclical and relatively predictable, recent years have been anything but in the property industry, and as we head into 2023, the fog of political and economic uncertainty shows no signs of lifting.
Even as a sense of bullishness returned at the start of this year, more shocks, in the form of soaring inflation, interest rate rises and the energy crisis, have
hit sentiment. And with UK government bonds reported to be yielding more than commercial property for the first time in 15 years, according to MSCI, some private investors will be thinking again about the risks and rewards.
Despite the cloudy immediate outlook, brighter spots do exist. As is usually the case in a downturn, investors that are both liquid and brave enough to deploy their capital in this market can snap up attractively priced assets.
However, unlike in ‘normal’ cycles, where opportunities have typically been present across the board, now investors need to be canny about which sectors they target. In the private capital space, the major motivation will be the potential to generate capital uplift: in contrast to institutional investors, this type of investor is not after long-term holds. Therefore, buying well is crucial.
One of the strongest property segments is the central London office market – specifically those properties with the potential to be refurbished, upgraded and repositioned as grade-A assets.
Prime properties are in high demand, while their supply is limited: according to Cushman & Wakefield, just 10.7m sq ft of grade-A offices are available across central London, while requirements for new space soared to 11m sq ft in the last quarter.
This is being fuelled by several factors. Although occupiers may need less square footage now that hybrid working has become normal, they want more premium space to appeal to staff (and clients) when they are in the office, seeing it as a vital tool to attract and retain talent.
ESG credentials
Moreover, businesses increasingly want space that burnishes their ESG credentials by reducing their carbon footprint, with better energy ratings and innovations such as smart lighting and automatic climate control. There are signs that a ‘green premium’ is already starting to emerge, creating a two-tier market with much higher valuations for buildings that have the highest EPC ratings than the rest.
In the regions, pockets of potential are likely to exist for private capital to team up with experienced development partners to redevelop specific properties or sites, adding value by upgrading or adding to the space or by changing the use.
For example, turning an industrial building into a viable logistics or warehousing space would capitalise on continued
high demand for these kinds of properties, as consumer appetite for online shopping shows no signs of slowing down.
Hotels are another worthwhile contender for investment in the current climate. In times of market dislocation, this a sector where there tends to be plenty of good-quality assets coming out of distressed portfolios or being sold by motivated sellers, representing extremely good value and uplift potential for investors who are prepared to enter this market now.
Amid today’s ongoing uncertainty, many would-be buyers are taking a wait-and-see approach until the outlook is clearer, leaving plenty of scope for private capital investors to pick up bargains with room for capital appreciation built in. Investing now is not an easy call: but it could be a smart one.
Claire Madden is managing partner at Connection Capital
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