This article was taken from the winter issue of the 1875. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
There’s no denying the British love of discussing property. With higher interest rates, a focus for many was around how much house prices might fall in the wake of tightened budgets and refinancing mortgages away from the rock bottom rates seen in recent years. Used as a catch all term, ‘the property market’ is generally associated with residential house prices. The ‘market’, however, is extremely diverse, covering a variety of sectors from private residential housing to industrial logistics assets. In a whistlestop tour of some of the main areas, we’ll be covering a short outlook of the sectors with longer-term tailwinds.
The private rented sector is one that most people will experience at some point in their lives, with renting a likely step before a first house purchase. Recent news headlines have focused on the rate of rental growth, with the average UK rent rising 6.2% in the twelve months to November 2023, the largest annual increase since January 2016. Rising interest rates have only increased the rental growth tailwind, with an additional supply squeeze shrinking landlord profit margins. A further squeeze is the growing difficulty for many to get on the first step of the property ladder, largely due to a number of pressures including high interest rates and the cost-of-living crisis. With such a highly fragmented market where individual private landlords are abundant, it is unsurprising to see institutional capital flow into the sector to take advantage. Listed companies such as Grainger Plc and PRS REIT have been growing their portfolios in recent years, with the latter surpassing its 5,000th portfolio home in mid-2023. Student housing provider Unite Group is also in on the action, with its first 178-unit build-to-rent property in Stratford, east London. It’s not just British investors entering the market, US private equity giant Blackstone secured a portfolio of yet-to-be-built houses from housebuilder Vistry for £819m in November, aiding its push into the sector. With the supply and demand imbalance tailwinds in place and significant capital flowing into the sector, private rental remains a key area for strong rental growth and stable asset pricing in the years ahead.
Logistics assets are arguably at the opposite end of the spectrum to residential, especially when it comes to size. Big box logistics warehouses are huge, and mainly found close to key infrastructure given their importance to supply chains. If you drive anywhere along the M1, you’ll be hard pushed to miss one of the giant sheds lining the roadside. Demand continues to grow as the e-commerce market shows little sign of slowing. The “bull case" put forward from property group Savills highlights the expectation of online sales capturing 28% of the retail market by 2027 from the 22% level in 2022. Estimated to generate another 48 million sq. ft of demand, the requirement for big sheds remains robust. Property company CBRE highlight in its outlook that while increased supply in the space has provided increased choice for occupiers, a slowing of the development pipeline is expected to continue in the coming year. While the proportion of vacant logistics assets could soften marginally, demand for the assets is expected to remain high from discount retailers and nearshoring companies. As such, rental growth is expected to remain relatively strong for the asset class going forward.
Modernisation of healthcare properties has been a key trend in recent years, with the demographic trend of an ageing population, increase in complex healthcare issues, and greater focus on reducing the burden on hospitals, healthcare centres capable of providing primary care services are of continued importance. Primary Health Properties, one of the leading Real Estate Investment Companies investing in the sector, estimates that 40% of the current primary care estate isn’t fit for modern healthcare requirements. With the continued working through of the COVID-19-induced backlog, modernisation of the estate is important, but faces a headwind of slowing development activity on the back of increasing build costs and lower risk tolerances according to CBRE. With costs higher, new investment activity is expected to maintain muted, with the focus placed on improving the current UK healthcare estate where covenants remain strong with the government the primary lease counterparty and the rent review structure mainly inflation linked or upward only. Current high-grade healthcare properties are expected to remain an attractive proposition, but rental growth is still required to offset increased development costs and improve the viability of new projects.
No matter the sector, a common theme remains a structural supply and demand imbalance. Growing demand and supply struggling to come onto the market provides stability for asset pricing and a driver for rental growth in the coming years. This imbalance coincides with another theme in the market, a focus on quality. Energy efficiency associated with higher grade assets is of continued importance with onset of sustainability reporting and regulations around minimum efficiency standards. The drivers highlighted above are expected to be consistent across the sectors, but more pronounced for the highest-grade assets within each.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance.