The UK economy, buoyed by a definitive General Election result, has likely reached a turning point, and in turn the country's real estate markets are set to rebound after a difficult period, according to CBRE’s UK Mid-Year Market Outlook 2024.
CBRE says the UK economy has returned to growth, following a recession at the end of last year, inflation has reached the Bank of England’s 2% target and there is a now a high probability of an interest rate cut in August, the first movement since March 2023.
The global broker adds that the positive signs of recovery could be further supported by the General Election result, which gives Labour a clear mandate to drive its policy priorities, particularly in the area of housing. It expects this to boost confidence.
“We are no longer living under the spectre of an impending election,” said Jennet Siebrits, Head of UK Research, CBRE, in a statement. “While our more than 50-year analysis has found no tangible difference to the overall performance of the UK real estate market, regardless of what political party is in power, we have seen that consumer confidence increases following an election over 70% of the time. Such a boost will provide a fillip to the economy."
Seibrits said Labour’s proposal to make the mortgage guarantee scheme permanent, drive infrastructure projects and potentially review business rates could stimulate activity in the real estate market.
CBRE's house view is that real estate transaction activity will gradually increase due to the improving outlook for interest rates, releasing pent-up demand following 18 months of relative inactivity. Additionally, according to CBRE research, sentiment is improving in the debt markets and both bank and non-bank lenders are looking to increase originations in the second half of the year, which should prompt investment activity.
CBRE says there are nuances in the outlook for commercial real estate sectors.
In the UK office market, CBRE says there is 9.1 million square feet of office development under construction which could complete this year, 60% of which is in central London. If that happens, completions will exceed average annual levels.
But CBRE points out that despite the high construction levels, 40% of the UK under construction pipeline to 2028 is already prelet or under offer, due to demand from occupiers for the highest quality stock. CBRE does not expect construction starts to maintain their recent pace due to high debt and construction costs and an increasingly challenging planning environment. In the longer term, CBRE anticipates a higher volume of refurbishments and material re-use in construction projects to sustainably regenerate obsolete stock.
In logistics it expects occupier demand to remain stable throughout the remainder of 2024, with third-party logistics operators and manufacturers continuing to have the greatest requirements. In the medium-term, the outlook for demand is positive.
According to CBRE’s 2024 European Logistics Occupier Survey, 58% of occupiers plan to expand in the next three years. CBRE says by the end of the year, the UK vacancy rate will likely stand at 5.5%, below the 10-year pre-pandemic average and the continued slowdown of the development pipeline will further support the sector’s supply and demand dynamics.
For retail, CBRE says investor sentiment was relatively positive in the first half of the year and its expects this to continue, with the forecast base rate cuts potentially leading to improved pricing for some retail sub-sectors. On the occupier side, there is little evidence of distress, it says, and occupiers that are in expansion mode will continue to target high footfall locations. As such, CBRE expects the vacancy rates and rental growth of major cities such as London, prime shopping centres and retail parks to outperform, with some now at pre-pandemic levels.
In terms of sustainability, CBRE points out that Labour’s manifesto strongly hinted at increasing energy efficiency standards in the private rented sector by 2030, which will require investment from many landlords. The party has for instance promised to create ‘Great British Energy,’ with the aim of decarbonising the power grid. CBRE suggests this will likely see hundreds of millions of pounds of public money invested into green energy infrastructure and represents an opportunity for private investors to co-invest.
For residential markets, the Labour party has promised to boost housing delivery through a mixed package of policies, including restoring mandatory housing targets, introducing a new taskforce to accelerate stalled housing sites, funding 300 more planning officers, the execution of a New Towns programme and a reform of the National Planning Policy Framework, which will include a review of Green Belt boundaries.
CBRE says mortgage rates will be the main determinant of activity for the remainder of the year and it expects house prices to increase by 1% in 2024 and for sales volumes to recover by 10%.
The adviser says the likely base rate cut could act as a catalyst for homebuyers and the residential investment market. Labour’s planned 1% additional stamp duty surcharge on non-UK resident buyers is not anticipated to have a material impact on overseas buyer demand and the planned continuation of the mortgage guarantee scheme would be positive news for first-time buyers, it adds.
CBRE says that due to the shortage of land and power for data centres in London, developers are looking further afield for the land and power required to build and run them.
Due to the challenges faced by providers in meeting the demand for data centre capacity, take-up is expected to exceed supply for the third consecutive year in London, with a delivery of 96MW of new supply against 130MW of take-up. CBRE says companies looking to house equipment that powers AI services will drive unforeseen demand for data centre capacity in the UK and as such, it expects deal size to grow in accordance with these AI-specific requirements.
CBRE also suggests a two-tier market for life sciences space may be emerging, with both repurposed office space and purpose-built lab space becoming available. It says both types of space will serve distinct purposes, with "more affordable sites offering cash-conscious biotechs viable options within strong life sciences ecosystems". Labour has outlined plans to increase government R&D spending as well as maintaining the UK’s participation in the European Horizon scheme, all of which CBRE describes as positive.
Jennet Siebrits, Head of UK Research, CBRE, said: “From a real estate perspective, we particularly welcome the commitment from Labour to reform planning policy. This has been an underlying challenge in our industry for some time and an overhaul of the system is long overdue if the UK is to meet much needed housing demand.”