Savills : unveils 2023 cross-sector UK forecasts
Retail warehouses and poor livestock land are set to see the highest investment returns between 2023-26 of 9.8% and 8.4% respectively, says Savills in its 2023 cross-sector forecasts. But while... |…
Retail warehouses and poor livestock land are set to see the highest investment returns between 2023-26 of 9.8% and 8.4% respectively, says Savills in its 2023 cross-sector forecasts. But while poor livestock land is set to see significant growth in its capital value, retail warehouse performance will be driven by income returns over the next four years, as will the vast majority of UK property sub-sectors (excluding rural assets) according to Savills, as the economy enters a new era, where capital returns slow, and income becomes the main drivers of investment performance. Savills projected comparative annualised returns: 2023-2026 inclusive In the commercial markets, despite rising interest rates and the cost of debt suppressing investment volumes and returns in late 2022 and early 2023, Savills says that continued occupier demand for prime high quality, highly rated sustainable offices and warehouses is set to deliver rental growth despite any recessionary shocks to demand. The international real estate advisor forecasts that commercial prime capital values are likely to reach their nadir in early summer 2023, as the opportunistic buyers massing globally call the cycle, while investors who follow structural trends will become comfortable that UK occupational dynamics have not materially changed. For residential property, Savills says 2022 marked a clear turning point. For private mortgage-backed purchasers, much higher costs of debt are expected to suppress transaction levels and put downwards pressure on prices in 2023 and - to a lesser degree - the first half of 2024. It forecasts mainstream house prices to fall by 10% at a national level in 2023, but these losses are likely to be made up by 2026, with a restricted number of repossessions/forced sales. The less mortgage dependent prime end of the market is expected to see smaller price falls, with central London in particular offering a currency play for equity-rich overseas buyers. While housing development activity will be squeezed by the prospect of a downturn in the market and an increasingly uncertain planning environment, Savills says the simple fundamentals of supply and demand mean there will remain plenty of space for investment and innovation across the housing sector over the next five years. In the rural markets, Savills predicts that farmland will continue to be a counter-cyclical play. Macro-political events have highlighted the regenerative power of food, fibre and fuel from land; it has weak negative correlation with interest rates, and has consistently outperformed inflation across the last 30 years. Savills predicts that prime arable land values will increase in real terms by 2.5% per year and poor livestock land to increase by 6% per year over the next five years, reflecting increased emphasis on both food security and climate targets. Meanwhile, commercial forestry land, having seen record capital value growth in the last 20 years, will now see slower growth, having matured, but will still be supported by the demand for timber and lack of supply. Across the sector high energy prices mean that returns on investment in rural renewable energy projects could be greater and the payback period shorter for landholders. James Gulliford, Savills joint head of UK investment, comments: "The second half of 2022 saw the most rapid repricing of market yields that we have ever recorded, and this sets us up for a return of activity and then a period of price stability later in 2023. In some sectors, for some investors, this could be the buying opportunity of a generation. But the long post-global financial crash cycle is over, and investors will have to approach this opportunity as a new era when income will be the main driver of total returns across most major asset classes." Savills commercial themes and top picks for 2023: A weak consumer environment in 2023 will lead to a softening in occupier demand for logistics from the peaks seen in 2020-21, but long-term near-shoring and shortening supply chains trends will support future demand for both logistics and manufacturing space. A slight short-term increase to the overall warehouse vacancy rate from near record lows in 2022 is probable, although as the economy returns to growth the undersupply of prime space will lead to rates falling and rental growth accelerating again. Retail capital values were adjusting before Covid-19, and therefore current high yields need less correction to reflect higher base rates. Q1-Q2 2023 will be tough for UK retail, but vacancy rates are expected to return to the downward trend begun in 2022 in H2 with some rental growth in some sub-sectors. High street shops in suburban and commuter towns are likely to outperform, given trends towards higher footfall, while bulky goods retail warehousing is more exposed given its dependence on the sale of big-ticket items. However, the high income return on offer will mean that this sector delivers some of the best commercial property total returns over the next five years. Lower office occupancy levels may be felt in terms of rising subletting, however, given the overwhelming lack of UK offices with high environmental ratings, and a fall in speculative development due to the tightening debt market, prime office rental growth remains deliverable. Top commercial investment picks for 2023: o Prime and green office development for delivery into 2025/6 o High street shops in affluent commuter towns & London suburbs to capitalise on agile working related shifts in consumer spending o Prime mid-box logistics development for delivery into an undersupplied 2024/5 Savills rural themes and top picks for 2023: Inflationary pressures will be more influential than interest rates on farmland as supply remains at historic lows and interest rates are still comparatively low. Any negative impact of rising interest rates will be tempered by the ongoing constrained land supply/demand imbalance. Consumer price inflation has seen output prices in commodity sectors rise (even if margins haven't necessarily improved), and competitive interest for nature-based solutions remain keen. With traditional purchasers of land facing stiff competition from a new era of deep-pocketed nature-positive and impact-motivated buyers, land values are likely to continue to outpace target inflation. The very limited supply of commercial forestry land will continue to drive values upwards, although not to the extent previously seen. Given forest acquisitions are very rarely borrowed against, interest rates have minimal impact on debt related sales. The forestry market is now maturing: prospects for capital growth are more closely linked to timber prices, and we are unlikely to see negative growth over the next five years. The monetisation of natural capital in response to the climate crisis remains the unknown factor. Converting the theoretical value of woodland into financial returns is key - the Government could do more to stimulate demand-side drivers. High energy prices mean that the returns on investment in rural renewable energy projects could be greater and the payback period shorter for landholders. For a mid-size dairy farm, a £50,000 installation of solar panels would have a 4.7 year payback period and a net profit after 15 years of £112,000 - a return on investment of 124% over this period or 5.52% per annum - based on current non-domestic energy prices, for example. Top rural investment picks for 2023: o Poorer quality grazing land: having increased by 20% since December 2020, demand is likely to continue over the next five years as pressure to re-carbon and re-nature land intensifies o Welsh farmland has underperformed compared to the other mainland nations and remains a pick for the future for capital growth Savills residential themes and top picks for 2023: Mainstream house prices will fall by 10% at a national level in 2023, but losses will be made up by 2026. Price falls and repossessions will be well below the levels seen in the early 1990s and post-2008. The two buyer groups who will be most affected by the rapid change in the affordability of mortgage debt, are first time buyers and mortgaged buy to let investors, supporting continued strong demand for private rented accommodation against limited supply. Institutional investors in the living sector are likely to benefit from private landlords carrying debt retreating from the market in the face of increased costs and regulation. High occupancy levels, strong demand for new stock and a growing income stream will entrench the credentials of this sector, even if demand is tempered in the short term. For housing development, the prospect of a downturn coincides with build costs and development finance becoming more expensive, and development levies increasing; the biggest casualty in 2023 is likely to be the number of homes built by both private house builders and housing associations with competing financial obligations. But a lack of new housing supply is only likely to be politically acceptable for a short time, particularly given the economic benefits from housebuilding, and the societal consequences of a failure to meet housing need. Top residential investment picks for 2023: o For Investors - Purpose Built Student Accommodation: During economic uncertainty, enrolment at university rises as students look to improve their chances of securing a job in a competitive market. Combined with growing pool of domestic students, we have seen strong growth in student numbers in the past two years. There remains a lack of purpose built supply in many markets, and the wider Private Rented Sector is under pressure with the falling availability of Houses in Multiple Occupation. As a result, universities are facing challenges housing their student, creating a strong opportunity to deliver new PBSA in major student cities. o For Owner Occupiers - Towns at the edge of the commute: With part- time commuting and hybrid working becoming more established, buyers are expected to stretch searches to the fringes of the "golden hour" commute; where they can get more for their monthly mortgage payments, but the need for a presence in the office part of the week limits how far they will go. In southern England that plays to locations such as Lewes, Hungerford and Banbury. o For Developers - Risk-off opportunities: In an uncertain planning environment, developers and housebuilders are likely to be more selective, focusing on the lower risk opportunities which, for example, comply with a recently adopted Local Plan or the where there is an existing presumption in favour of development. Attachments Original Link Original Document Permalink
Disclaimer: This content was published by Savills plc on the 19th of December 2022. The sole responsibility for its contents is held by Savills plc. Published by Public at 11:44:14 UTC on December 19, 2022.
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