After a solid performance in early 2022, the UK real estate market is slowing down and a price correction is underway as a result of waning economic growth and higher financing costs.
According to the DWS UK Real Estate Strategic Outlook for Q3 2022, the most evident repricing has been in logistics and City of London offices, with outward yield movement forecast across almost all sectors in the coming months.
Property investment volumes totalled £12.8 bn (€14.6 bn) in Q2 2022 (-38% on the previous quarter), as investors adopt a ‘wait-and-see’ approach, with residential the only sector recording a quarterly increase.
Prime values are set to drop by up to 10%, with the office sector seeing the largest correction given its exposure to remote working.
Supported by stronger rent growth, prime logistics and residential are likely see more modest value declines; however, secondary, low energy-rated properties are in for greater falls.
Residential should be one of the more resilient segments in the face of economic uncertainty and persistent inflation.
Performing well are London (Zones 2-6) and the regional cities of Bristol and Manchester, supported by solid demographic trends and an undersupply of new housing.
As Europe’s most mature student housing market, the UK will remain a top pick for investors over the coming years.
The upward trend in student numbers is set to continue, while the undersupply of student beds should result in healthy rental growth mainly in large student cities such as London and Bristol.
Prime assets are expected to outperform the wider market, supported by lower void periods, stronger occupier demand and higher liquidity.
Pre-letting of Central London offices is increasingly common due to shortage of prime available office space, with a preference for premium office space with top ESG credentials.
Vacancy in the UK logistics market is currently at a record low with strong occupier demand, but the sector will face lower consumer spending, slowing e-commerce growth and a substantial rise in business rates from April 2023.
Due to exceptionally tight supply and competition from other land uses, urban logistics is set to drive strong rental growth.
The recovery of the retail sector, in the short term, will be hindered by falling consumer spending, alongside rising energy, labour and transport costs, while vacancy rates are stabilizing or even going down.