27th February 2023

Q4 Market Update 2022

Written by Andrew Barlow, Head of Asset Management 



The effects of the pandemic caused inflationary pressures in global economies as well as in the UK, where the Consumer Price Index (CPI) rose dramatically and reached 10.5% in December 2022, although is now expected to have peaked. The spike in inflation was caused by the reopening effects after the pandemic, strong domestic wage growth, global supply chain disruptions and higher commodity prices, exacerbated by the ongoing war in Ukraine. As a result, the UK saw sharp rises in the Bank of England (BoE) Base Rate and now having reached 4.00%, the expectation is that rates are nearing a peak.

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 There is the potential for further rises in 2023, and whilst forecasts vary, current Economist consensus is that the BoE Base Rate could peak at between 4.25% and 4.50%. CPI inflation is now forecast to come back in line with the BoE’s target of 2% by late 2023 / early 2024, as current inflationary pressures ease.  


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During the course of 2022 and following the Truss/Kwarteng “mini-budget”, UK bond yields spiked significantly and having already softened in Q2 2022, the property market saw dramatic price falls and outward yield movements. For a short period, the spread between 10-year gilts and the annual all property rolling transaction yield narrowed considerably during H2 2022, but has started to widen again as property values have largely stabilised and interest rates approach their peak. The current premium of all property yields over 10-year gilts of c.220 basis points is in line with the long term average pre-GFC. In addition, property remains significantly less volatile than equities and traditionally provides a hedge against inflation, particularly where rents are subject to CPI increases.

Real Estate.

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For the calendar year ending 31 December 2022, total returns from UK commercial property declined by 9.1%, according to the CBRE monthly data index, and whilst returns rose by 9.2% in H1 2022, they then declined by 17.5% in H2 2022, which compares with the FTSE All-Share Index at -0.34% and bonds at -25%. UK property provides a higher income return of c.5.00% per annum and an opportunity to create capital value growth through sector and stock selection, as well as active asset management.  


UK property transactions in the year to 31 December 2022 totalled c. £54 billion, an expected decrease from the £60 million in 2021, with a strong first half of 2022 followed by a sharp slowdown during the remainder of the year. This is only marginally below the 10-year average, demonstrating the strength of the investment market for UK core product, particularly amongst overseas investors.  


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Demand for prime and sustainable assets delivering long term core income is expected to remain strong. Where properties are well located, but deemed secondary due to the lack of management or level of obsolescence, they provide excellent opportunities to deliver strong returns by closing the Yield Gap through development, repurposing or substantial refurbishment and improvement of the income quality. 


The economic, consumer and technological trends accelerated by the pandemic helped the industrial sector significantly out-perform all other sectors until Q2 2022, when the period of historically low interest rates and monetary policy support abruptly came to an end. Despite this, these longer term structural changes continue to underpin strong occupational demand for industrial and logistics space with the highest sustainability credentials. 


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Demand from online retailers, logistics operators and low carbon industries resulted in another strong year in 2022, above the 5-year average, which in turn has maintained a low availability of c.4%, with prime rents continuing to grow. A lack of supply still defines the market and whilst speculative development accelerated in 2022, the sharp outward movement in yields and build costs in H2 2022 have made development less viable. In addition, residual land values have fallen dramatically although vendors are currently reticent to sell land at these reduced prices, which will likely limit the supply of future sites until the market has stabilised and pricing expectations have reset.  


In terms of structural changes, the market is seeing logistics occupiers pivot away from just-in-time management for last-mile logistics and multi-let assets, to more regional and domestic supply chains, coupled with the increasing use of technology to make operations more agile. In summary, the market is still seeing strong occupier demand which in turn is delivering rental growth. 




The self-storage sub-sector has continued to show strong growth in recent years, with the average rental rate increasing by 9% in the last 12 months to over £26 per sq ft. A number of further positive indicators are evident as the industry annual turnover has increased by 4.5% to £930 million. Self-storage is highly reliant on domestic customers who make up 81% of space let, with the remainder being business users, but this is an area of investment opportunity where small plot sizes command far higher rents than conventional industrial space.   


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There has been much anticipation of what the “new normal” may look like for the office sector as we emerge from the pandemic and trends to hybrid working become more apparent. Changes to longer term occupational requirements are likely with size, accessibility, flexibility, amenities, and sustainability coming to the fore. An indication of this is the reported downsizing by HBSC which is reported to be looking for an office that is less than half of the size of its current 1,000,000 sq ft Canary Wharf office. 


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Despite millions of office workers continuing to work at least partly from home, demand is however recovering well after the initial hiatus in 2020. The prospects for 2023 and beyond are much brighter, particularly for regional secondary office stock that can be re-positioned as prime sustainable accommodation offering rental growth opportunities. 


Retail Warehouse

The final quarter of 2022 concluded a turbulent second half of the year, seeing recent yield gains quickly eroded, and a brief pause in transactional activity. 2023 presents a brighter outlook, as recognition of the sector’s durability grows and markets adjust to a new but more table macro-economic backdrop. The occupational story remains robust despite reported retail sale volume declines.  


This sector has proven resilient, both from an occupational and investor perspective. This is due to the strong trading of certain retailers highlighting a strong return to in-store, benefitting from the demise of some online operators and transport strikes increasing car borne trips. Interest in the sector is still strong for best in class assets, but also for opportunities where poorly performing or under-managed properties can be re-purposed for trade-counter and industrial uses offering very attractive value add investments as well as mixed use destinations. 




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The UK’s ageing population is well documented with around one-fifth of the UK population in 2019 aged 65 or over (12.3 million people), and expected to make up 24% of the population by 2043 (17.4 million people). This continues to drive demand for care home beds and for a wide range of later living options. 


The challenges facing the care home market during the pandemic have acted as a catalyst for care home operators to review their portfolios and identify properties for re-provision. They are now coming forward with highly targeted requirements for modern purpose-built stock. 


The last 12 months have also witnessed improved movement and fluidity in the housing market, which has prompted developers of senior housing to accelerate acquisition programmes and target more locations to increase turnover and market share. Market conditions for participation in the sector are excellent, predominantly from a land trading perspective, especially in connection with larger sites which are capable of sub-division to provide a range of end uses.  



There is a reported £12 billion of identified investment targeting life sciences, a real estate sector which has always been strong in the UK, but has more recently flourished since the pandemic. The acute demand and supply mismatch can be seen in a number of locations, and none more so than in the Oxford market, where the development pipeline in Q4 2022 of c. 300,000 sq ft compares to recognised demand in excess of 2 million sq ft. Additionally, the demand is evident for larger facilities owing to multi-national medical, data and tech companies seeking to invest in “med-tech”. The last two years have seen record levels of investment both in terms of funding for companies and from developers looking to acquire life science assets and development opportunities. 


New developments in the core life science markets are expected to underpin the sector in 2023, however, there is also a growing number of regional cities with life science schemes such as Birmingham, Manchester, Liverpool and Newcastle, and these are expected to continue strengthening in 2023, as the UK’s ageing population drives long-term demand. 



As with the commercial sectors, residential property hit a pinnacle of uncertainty in the early Autumn of 2022. Consumer confidence plummeted as inflation expectations and gilt yields soared after the mini-budget. The largest increase in the BoE Base Rate for 30 years brought a rapid change in the affordability of mortgage debt. The purchasing power of the majority of buyers was quickly curtailed, as the much higher costs of debt suppressed transaction levels putting downward pressure on prices.  


However, a repeat of the price falls of the early 1990s or 2008 is unlikely, as a combination of relatively low unemployment and lenders forbearance are expected to restrict repossessions. Meanwhile, the extent to which borrowers have locked into fixed rates and had their affordability stress tested by lenders, means the shock to homeowner finances should be manageable. Predictions of potential value movements in 2023 vary, but the highest overall house price falls of c. 10% have been forecast by Savills at a national level, with average growth of 4.25% still predicted from 2024 – 2026.     


The two buyer groups who will be most affected, are first time buyers and mortgaged buy to let investors, however, the prime housing markets are expected to be less affected by  increased costs of borrowing. From a development perspective, the prospect of a downturn in the housing market comes at a time when Help to Buy has been brought to an end, build costs and development finance have become more expensive and development levies have been increased.? 

This in turn is putting pressure on development land values and a fall in housing delivery. For the Barwood development schemes in the BRIP platform, where the majority of sales are to equity buyers, there have been no price reductions owing to the quality of new product in desirable locations with a shortage of supply.  



Since the last General Election in December 2019, the Government has been thwarted by the pandemic in delivering on policies to address regional inequality and level up the country through infrastructure, skills, and innovation. This was compounded by political and economic crises which followed in 2022 and a mild recession which is expected in 2023. However, whilst the political landscape has changed materially over the last 12 months, investors are increasingly looking to the regions to invest in areas of economic growth such as the life science clusters outside of the Oxford, Cambridge and London triangle, a sector which has seen record investment over the last two years. 


London’s population is expected to have declined in 2022 for the first time since 1988, in part due to large numbers re-locating to other parts of the UK.  This is also part of a longer-term trend due to regional job availability, the high cost of living, a smaller number of graduates moving to London and lower international migration as a result of Brexit. 


The regions have a far more diverse range of sectors than London, including engineering, science and technology and the public sector, which offer investors greater diversification and resilience. Business location decisions are driven by access to specific markets, skilled and unskilled labour and housing.  With greater flexibility in working practices and changing lifestyle choices evolving from the pandemic, the UK regional occupational markets offer exciting opportunities to capitalise on over the next phase of the recovery as confidence returns and investors are looking to deploy significant capital in the real estate growth sectors.