January
A new year, a new sense of optimism as real estate dared to entertain the hope that it could finally look past the Covid-19 pandemic.
London office deals back to pre-pandemic levels, cheers Cushman & Wakefield! Commercial real estate investment predicted to hit a five-year high, squeals Colliers! Our results are “very significantly ahead of expectations”, says Savills! Build-to-rent homes were booming, rents were stabilising and slowing outflows even suggested some degree of thawing in the frozen funds market. And that pesky work-from-home guidance? Gone.
Any clouds on the horizon? Well, some economists predicted that inflation could rise to as high as 7% this year. Was that 7%? Let’s revisit that in a few months…
February
The government’s long-awaited levelling-up strategy was finally unveiled – and failed to impress. Too little new money and too few new ideas, said real estate players speaking with EG. “I haven’t the faintest idea what they really mean by levelling up,” said former British Property Federation chief executive Liz Peace.
CBRE was in expansion mode, sealing a deal to buy retail agency CWM in a transaction it said would “significantly strengthen” its retail and leisure real estate capabilities across the UK. Stifel analyst John Cahill said he expected “bolder changes in strategy” ahead for FTSE 100 REITs British Land and Landsec under new(ish) chief executives Simon Carter and Mark Allan, setting the tone for another year in which the biggest listed names carve a new path.
Signs of a roaring market are apparent in Cambridge, where demand for offices and labs hit its highest level since 2014, with lab yields moving lower than prime office yields for the first time on record. As the month neared an end, Russia’s invasion of Ukraine sent stocks spiralling. We also had another new housing minister – Stuart Andrew. Let’s see how long he holds on to that post…
March
Real estate’s reaction to Russia’s invasion was quickly apparent: agencies pulled out of Russia, the government explored how to freeze real estate assets of individuals linked to Vladimir Putin, MIPIM confirmed there would be no Russian exhibitors at the annual Cannes trade fair and British Land said it would end an office lease with Russia’s state-owned Gazprom as soon as possible.
In deal news, flexible office group Workspace agreed a £272m takeover of McKay Securities, continuing a notable run of consolidation in the listed real estate market; Brookfield struck a €1bn (£857m) deal for Ireland’s Hibernia REIT; British Land sold half of its Canada Water scheme to pension giant AustralianSuper for £290m; and The Office Group and Fora announced their own flexible fusion.
Real estate companies hit out at the government’s seemingly dwindling support for the Oxford-Cambridge Arc and its role in bolstering the UK’s science and technology sectors. “If the market was ready to go with it and if it was going to be a success story, I don’t know why [government has] abandoned it,” said regeneration specialist Jackie Sadek.
April
This year no project epitomised the retrofit-versus-redevelop debate more than Marks & Spencer’s plans to demolish and rebuild its Oxford Street store close to Marble Arch. Waved through by Westminster council last year, the scheme attracted criticism for the environmental damage it could cause. In April, London mayor Sadiq Khan confirmed he would reconsider the approval, although within days he decided there were no grounds on which he could order the project halted. However, Michael Gove, secretary of state at the Department for Levelling Up, Housing and Communities, blocked the council from giving a final sign off until he had reviewed the proposals.
Hot on the heels of CBRE’s play for CWM, Newmark confirmed a long-awaited takeover of Tony Gibbon’s BH2. British Land sold a 75% stake in its Paddington Central assets to GIC for £694m.
May
The growing threat of inflation to the real estate market was highlighted by the team at MSCI, which said investors would need to place an even greater focus on the stability of their income streams. Developers including British Land and Landsec pushed to lock in construction costs while they could.
The month of May saw two more sizeable M&A deals in the listed market, as Shaftesbury and Capco confirmed talks while LXi REIT and Secure Income REIT announced their own tie-up. A warning from Amazon that it had overreached in terms of taking warehouse space hit the shares of public industrial investors, although many in the UK market argued the tenant base was diverse enough to withstand the e-commerce giant stepping back.
And it was late and over-budget, but London’s Elizabeth Line – hailed by the great and good of the capital’s real estate market as a “game changer” – finally opened.
June
A long-awaited review by Lord Michael Bichard’s into the RICS’ governance and purpose promised to “return control” to the organisation’s members, with 36 measures that Bichard said could help to turn around the troubled body. John Lewis set out on a partner hunt for its build-to-rent business, as new names continued to pour into one of the UK’s fastest-growing real estate asset classes (it would later confirm a tie-up with fund manager abrdn).
Michael Gove called for a public inquiry into the M&S Oxford Street scheme, much to the retailer’s displeasure. And as celebrations began for Queen Elizabeth II’s Platinum Jubilee, EG looked back to its issue from her coronation in 1953. Back then, Myles Francis, president of the Chartered Auctioneers’ and Estate Agents’ Institute, gave a rallying cry for the industry: “I call on those who look to the [institute] for leadership to take the coronation as an occasion for reflecting on the influence their work can have on the health, prosperity and happiness of their fellow citizens.”
July
Boris Johnson’s resignation meant the month centred on political upheaval as the race began to be the UK’s next prime minister. As the list was slimmed down to Rishi Sunak and Liz Truss, all real estate could ask for was a little certainty. Good luck with that, particularly as the fifth housing minister in as many years was one of the resignations to ultimately bring about Johnson’s downfall.
Bayes Business School pointed to a “rapid decline” in the European real estate debt and equity markets due to soaring energy prices, interest rate rises and the ongoing war in Ukraine, while Jefferies analyst Mike Prew said UK REITs appeared to be “being priced for Global Financial Crisis II”.
August
With growing signs of an economic downturn across many markets, big real estate agencies started to suggest that hiring would need to slow. Also sounding a downbeat note was the team at Berenberg, which said the UK’s listed real estate market faced an environment that is “certainly the toughest in over a decade”.
But as companies looked to shore up their balance sheets, many also moved to ensure they were protecting their employees, not least as a cost-of-living crisis bit. As Grainger chief executive Helen Gordon put it, when the company confirmed £1,000 in support to each member of staff: “We wanted to make sure our people are feeling reassured that we understand the potential financial challenges they may be facing ahead of any energy pricing reviews.”
September
The death of Queen Elizabeth II saw the real estate industry pay tribute to an individual who had been, as Grosvenor Estate owner the Duke of Westminster put it, “a focal point for international unity, inspiring us all to draw the best out of each other and our communities”. Industry figures also wondered aloud how the built environment interests of new monarch King Charles III would shape his reign.
In other news, an investigation by EG revealed that the equivalent of the combined annual income of the UK’s top 10 listed real estate companies by market cap could be wiped out by changes to EPC rules. New prime minister Liz Truss and chancellor Kwasi Kwarteng rocked the markets with their government’s so-called mini-budget at the end of the month, the economic shock from which helped to scupper a £500m deal within days, as LXi REIT walked away from the acquisition of a portfolio of Sainsbury’s supermarkets.
October
Liz Truss’s resignation as prime minister and Rishi Sunak’s appointment as her successor went some way to calming markets. Michael Gove’s return to a role he was sacked from by Boris Johnson meant there was some newfound stability in the levelling-up agenda. Nonetheless, investors and agents hunkered down for a tough end to the year, in terms of transactions and listed real estate companies faced a sombre outlook.
But some good news – after many false starts and a decade of work on the current scheme, power was turned back on at London’s Battersea Power Station. “Whatever has been thrown at us, we persevered and prevailed,” said Dato’ Jagan Sabapathy, chairman of Battersea Project Holding Company.
November
The great repricing was underway, according Bayes Business School’s Nicole Lux, who added that discussions at CREFC Europe’s Autumn Conference “confirm prices are being chipped by 20-40%”.
In the London office market, less than £500m was transacted between the start of October and late November, said Martin Lay, Cushman & Wakefield’s head of London offices capital markets. That would mean 2022 could mark “one of the lowest levels of activity on record in the final quarter”. Deloitte’s latest crane survey showed developers as worried about the outlook for leasing and their development pipelines as at any time since the depths of the Covid-19 pandemic. Agents cut their forecasts and started to cut jobs.
British Land and Landsec mapped out their acquisition and disposal strategies during a downturn. The public inquiry into the M&S Oxford Street redevelopment finally finished. And Lucy Frazer took on the housing minister mantle, becoming the fifth person in the post this year after Chris Pincher, Stuart Andrew, Marcus Jones and Lee Rowley all left the role.
December
End-of-year tallies from real estate analysts made for grim reading and few suggested that 2023 will be much easier. MSCI found that the UK had led the falls in one of the toughest periods for European real estate since the global financial crisis of more than a decade ago. But of course, where there will be challenges there will also be opportunities.
The team at BlackRock Alternatives put out its outlook paper for the year ahead, highlighting the asset classes in which investors could manage to trade off higher volatility for better returns. Pointing to UK asset classes with the highest expected returns, the team highlighted London offices despite higher volatility, while student housing stood out for lower volatility and logistics lay between the two. UK retail was seen as having lower relative returns against higher market volatility.
CBRE did not shy from acknowledging the challenges ahead in 2023 but added that 12 months from now, “the clouds will begin to break”. Here’s hoping that holds true.
To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews
