“Move fast and break things” attributed to Mark Zuckerberg, that phrase is so apposite for the current occupant of the White House.
In addition to the huge shadow President Trump casts over geopolitics and global macroeconomics (and therefore on the hopes and ambitions of the UK property market), UK ‘s real estate actors also have to contend with a number of other profound market issues – as we heard from Jennifer McKeown, Capital Economics’ Chief Global Economist and Bill Page, Legal & General’s Head of Real Estate Research, who recently addressed the annual Fisher German Property Briefing.
The impact of Trump’s (on-off) tariffs are compounded by other factors such as:
- UK’s stagnating domestic economy
- The ramifications of the loss of the Chancellor’s £10bn financial headroom - a problem she apparently intends to address (at least partially) by cutting benefits, amongst other measures
- A proposed increase in defence spending - primarily funded by cutting foreign aid
- Inflation still exceeds the Bank of England’s 2% target
- Interest rates hovering around 4.5% which, together with house price inflation, is creating profound affordability issues for UK home buyers.
Add to that potent mix of adverse macro-economic factors was the announcement in the October 2024 Budget that the cost of business will soon be increasing quite significantly (with the increase in employers’ National Insurance Contributions and the proposed increase in minimum wage rates). Not surprisingly, this has led to business confidence in the UK going through the floor – according to CBI’s ‘Industry Optimism’ research.
Against this backdrop UK’s real estate sector seems to have bottomed out and is quietly, but confidently, gaining momentum across the board. Although the office sector continues to struggle as it wrestles with the combination of employers trying to ascertain what their occupancy requirements are (in an age of flexible working) and demand for Grade A space exceeding supply - the oft quoted ‘flight to quality’. The latter is compounded by the fact that dearth of high quality new and refurbished stock is also impacting supply.
According to Bill Page, the industrial sector, the darling of the post-pandemic period, is less ‘hot’ than it was, but still a good bet for investors.
He reiterated the fact that retail is making a strong comeback (having hit rock bottom a few years ago, it is now emerging from its structural crisis) and the living sector is still very good value in terms of both yield and capital growth.
Hence the cry ‘beds, sheds and meds’ remains a compelling proposition for CRE investors.
Given the Trump factor, I wondered if commercial thinking from ‘over there’ would influence business decisions ‘over here’?
It is interesting to note that although major US corporates such as Goldman Sachs, Accenture and Amazon studios are adopting ‘The Donald’s’ approach to diversity & inclusion, we in Britain are not following suit and neither are we deviating from our sustainability and Net Zero strategies and policies. To quote Bill Page, the green agenda is “…baked in…” to how we do business in the UK.
I wondered if it is only a matter of time before climate scepticism creeps into the US CRE community as they try to be seen to embrace Trump’s climate related philosophy - he is famously and repeatedly quoted as referring to the climate crisis as “… one of the great scams….”.
(Whilst on the campaign trail, leading up to the November 2024 election, Trump reportedly offered oil bosses a “…deal …” if they gave him $1bn for his White House re-election campaign. The deal? If elected, he would shred dozens of environmental regulations and prevent the introduction of any new ones.)
The worrying question is, will British “baked in” pragmatism withstand any climate denying doctrines which waft across the Atlantic to our shores?
I think so because, in the course of breaking-things-and-moving-fast, Trump has ruptured the Western Alliance. I think that the new but fledgling autonomy, evident in the UK’s and Europe’s defence strategy thinking, will spread to other consensus issues.
His isolationist doctrine has already driven a political wedge between the US and Europe and informed commentators have suggested that it will also act as a catalyst to engender autonomy in every other aspect of business and realpolitik.
So what did we learn from our macroeconomic and property experts?
Over the next 12-months the economy will improve: inflation will come down; interest rates will come down; wage inflation will improve but will not resolve the affordability problem which many house buyers face; and GDP will rise in 2026.
The big question is, will this Government be able to break a 55-year house building habit and build 300,000 new homes a year?
Whilst private UK investors and US private equity have largely kept the UK property sector alive, the return of national and international institutional investors are likely to follow.
The key factor determining investment returns, at this early stage of a new cycle is rental growth, driven by shifts in occupational demand and undersupply of new developments - rather than yield compression.
With stability gradually returning across sectors, I fully concur with Bill Page’s opinion that there is a case for developing a “balanced fund” approach, with opportunities coming from long income and operational income strategies that span beyond the “in vogue” industrial and living sectors.
However, I keep coming back to one of Bill’s concluding remarks: property returns are likely to be “good but not great…”
What has been gnawing away at me is, is “… good …” not a good thing?
In the near term, the office sector is active: there remains strong value potential in the industrial sector; retail is largely rebased and, together with the living sector, appears to offer the potential for the most compelling buying opportunities.
In addition, the Government’s recently announced Planning and Infrastructure Bill promises to accelerate planning decisions and therefore boost housebuilding, as well as “…vital developments like roads, railway lines and windfarms.”
Consider the facts: 1.5m new homes to be built in the next four-years: 150 major projects earmarked on the Government’s to do list: 29 new data centres (the engine rooms for Britain’s AI ambitions) have already been announced by 23 data centre companies: Development Corporations will be strengthened to make it easier for them to deliver large scale developments (such as the Government’s new towns) – if you are in real estate in the UK, surely the future looks great, not just good?
