The UK appears to have won global real estate’s “race to the bottom”, according to the team at M&G.
In the asset manager’s mid-year Global Outlook report, the team said rising rates and the “disastrous” mini-budget last autumn meant the UK had undergone a starker real estate repricing than anywhere else in the world. Now, the team said, values “look to be finding a floor”.
“Taking a glass-half-full view, the UK economy has seemingly swerved a widely anticipated recession and, while the economic outlook appears muted, sentiment points to growth, supporting occupier demand,” the team said.
“Meanwhile, investor sentiment has also strengthened. Where yields have substantially repriced – with value re-emerging – and there is a strong narrative around long-term viability, notably for multi-let industrials and retail warehouses, there are already early signs of a return to yield compression. The living sector remains in favour too, supported by a buoyant rental growth outlook, a trait that will be much prized in an environment of high inflation.”
Nonetheless, M&G pointed to downside risks that might mean “any optimism is a false dawn”, including the impact of higher mortgage rates, inflation that remains high and the effect of further public sector strikes, all of which could still push the economy into recession.
“Meanwhile, if debt costs for commercial real estate in the UK rise further – meaning the numbers simply don’t add up – it could be a major roadblock for the asset class’s recovery and potentially lead to renewed falls in capital values across the board,” the team added.
“This would particularly be the case for parts of the market that are already under pressure, notably non-core offices or assets that do not meet environmental standards. The potential for further banking volatility poses risks that should not be ignored.”
Jose Pellicer, head of investment strategy at M&G Real Estate, (pictured) said: “Global real estate markets are rebalancing, but we’re not out of the woods yet.
“The good news is that we’re not facing another global financial crisis – banks are now much better prepared to cope with long periods of turmoil and uncertainty. But we shouldn’t forget that structural changes such as hybrid working and the rising importance of ESG means that some non-prime assets may not survive.”
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