H1 2024 Market Update

By Jonathon Ellerington

This year began with a sense of optimism, marked by encouraging signs of economic recovery. The UK economy pulled itself out of recession at a faster pace than first thought, with GDP expanding by 0.6% in Q1 on the back of surging retail sales and rising consumer confidence. The positive sentiment and cascading CPI inflation rate, from 11% in 2022 to 2% in June 2024 led to calls for a first cut to the Bank of England ‘BoE’ base rate in over four years. This was despite the best efforts of Taylor Swift whose UK tour led to a large rise in hotel inflation, up to 9.8% for June 2024.

The ‘Taylor Swift Effect’ aside, the BoE held steadfast, wanting to ensure that the drop in inflation was sustainable. A rate cut didn’t transpire until August, to the relief of many households and businesses that were hurting from higher mortgage costs and debt repayments. As cost-of-living pressures continue to ease, consumer demand is expected to rebound, creating a more favourable environment for both occupiers and investors, thereby stimulating market activity. It is the increased household spending power which is forecast to be the main driver of stronger economic activity for the UK over the next two years.

H1 2024 also saw a shifting political landscape, with the Labour party securing a landslide victory and 411 seats, providing them a robust mandate to implement their policy agenda. And it was Labour’s inheritance which dominated the headlines in July with the new Chancellor, Rachel Reeves provided a sobering assessment of the UK finances in July, outlining a £22bn black hole in the public finances. As such, all eyes will be on the Budget which is set to be announced on the 30th October, where detailed tax and spending policies will be presented.

From a real estate perspective, Labour's commitment to planning reform is particularly noteworthy. The protracted process for obtaining planning permissions has doubled over the past decade, presenting a significant challenge to growth. Furthermore, the proposal to make the mortgage guarantee scheme permanent is a crucial step in supporting first-time buyers. Infrastructure projects, such as the £1.8 billion allocation for port upgrades and supply chain development, alongside a review of business rates, are poised to benefit both occupiers and investors.

Real Estate

Following the moderation of UK real estate capital values during 2023, the commercial real estate market continued to cautiously improve in H1 2024. The first positive all-property capital growth in two years (albeit at 0.1%) was reported during the second quarter of 2024, according to MSCI’s UK Quarterly Property index. Unsurprisingly, the results were a mixed bag across the various property sectors with the residential and industrial sectors offsetting the continued weakness of the office sector. Total return, made up of the capital return plus the income return was 0.0% in Q2 on a year-on-year basis. As a result, there is growing evidence that capital values at the all-property level have now bottomed out.

Investment activity is expected to gradually improve as investors explore opportunities with adjusted real estate prices. In Q1 alone, commercial property investment volumes in the UK reached approximately £8 billion, which, if maintained, would result in a roughly 12% increase compared to the total investment volumes for 2023. However, this outlook depends on geopolitical concerns remaining stable. A study by Natixis Investment Managers in January revealed that institutional investors in the UK increasingly view geopolitical risks as the primary economic threat for 2024.

Industrial

The Industrial and Logistics market showed continued improvement throughout H1 2024. According to research by Cushman & Wakefield, occupational demand has strengthened, with Q1 and Q2 figures surpassing their 2023 counterparts. In the first six months of the year, take-up reached 20.1 million sq ft, 18% above the five-year pre-pandemic H1 average, largely driven by several significant transactions exceeding 300,000 sq ft. There remains a strong focus on acquiring high-quality facilities, which is promising for rental growth, especially given the decreasing total availability. Total availability dropped for the second consecutive quarter, falling by 3% in Q2 2024.

Self-storage

Over the past year, the self-storage sector has continued to expand, with UK self-storage space increasing by 8.1% and reaching a total of 60 million square feet—three times the amount available in 2005. Despite recent challenges such as decreased inquiry levels and rising living costs, the industry has maintained steady growth. The sector remains highly attractive to major investors, with operators actively pursuing both organic growth and acquisitions. In 2024, investment volumes have already exceeded previous levels, highlighted by the notable £378 million cash purchase of AIM-listed Lok’nStore.

Offices

Over the past two years, the UK office market has been heavily influenced by discussions of a ‘structural shift’ due to changes in workplace use and occupancy. While this shift is indeed occurring, current cyclical challenges for landlords may be overshadowing these long-term trends. Research by CBRE indicates that office take-up in the UK reached 1.2 million sq ft in Q1 2024. Over the past 12 months, total take-up was 4.8 million sq ft, marking an 8% decline from the previous year. The figures also show a 4% drop from the previous quarter and a 4% decrease compared to the five-year average. Despite these trends, prime office spaces continue to attract strong demand, with three of the top five deals in Q1 involving newly marketed or recently refurbished properties. In terms of occupier composition, the Business Services and Professional sectors were the largest contributors to the market, accounting for 20% and 19% of total take-up, respectively.

Later Living

The UK population is aging rapidly, and both current and future older cohorts are increasingly affluent. However, there is a significant gap between the number of affluent older individuals and the sector's focus, which is heavily skewed towards affordable housing. According to JLL research, as of Q2 2024, there are 25,737 senior housing schemes with 771,848 units. With an average of 1.3 residents per unit, this equates to approximately 1 million residents, representing only 15% of those over 75 in the UK. The UK senior housing sector is poised for sustained demand, presenting a substantial opportunity for both operators and investors.

Summary

Investor confidence is definitely improving as sustained growth in specific real estate sub-sectors, such as industrial, self-storage, later living, and student accommodation, is expected to offer attractive returns for existing investments and promising buying opportunities throughout the remainder of 2024.