Thought of the Week
Is foreign investment in UK real estate rising despite the downturn?
June 13, 2024 3 Minute Read
Transaction activity in the UK real estate investment market has been muted over the last 18 months, with investors challenged by higher interest rates and falling capital values. At £43bn, total investment in 2023 was at its second lowest level for a decade. The lowest level was recorded in 2020 during the pandemic.
Still, not all real estate investors reacted to the market conditions in the same way. While the amount purchased by domestic investors fell 16% year-on-year, foreign investor purchases declined by a larger 44%. This pattern was not unique to the UK. Many other European countries saw a greater percentage fall in foreign acquisitions too, which is not unexpected. So, were foreign investors simply pausing investment into the UK as they waited for markets to settle, or were they actively divesting from UK real estate during this period?
Looking at net investment trends shows that, despite a fall in transactions in 2023, foreign investors have increased their holdings of UK real estate overall. Since the beginning of 2022, foreign investors have purchased £50bn, but sold only £29bn of UK real estate, meaning a positive net investment of £21bn.
North American investors have contributed most to net investment since 2022, with over £8bn more purchases than sales in this period. They have continued their purchasing activity this year, acquiring £2.6bn of UK real estate in Q1 2024 alone, with recent investment aided by the strength of the US dollar. However, the UK has also attracted Asian capital, with over £6bn more purchases than sales by Asian investors since 2022. This is ahead of investors from the rest of Europe, who made a net investment was £5.6bn over the same time frame.
We can positively conclude that foreign investors are increasing exposure to, and not divesting from UK real estate. This trend is expected to continue through 2024. In our 2024 European Investor Intentions Survey, European investors selected London as the most attractive city for investment and the UK as the market with the highest performance expectations.
Moreover, it seems increasingly likely that the second half of the year could be the turning point in this current cycle. Firstly, the economic outlook is improving, with UK inflation continuing to fall and interest rate cuts likely in the second half of the year. Secondly, it appears that the market pricing has reached, or is near, the trough. And finally, an early resolution to the general election in July will prevent any residual political uncertainty and, regardless of the outcome, will symbolise a new beginning for the UK. All together, these factors will create a favourable environment for investors.
Figure 1: Net investment by foreign investors in UK commercial real estate (Purchases less sales, £bn)
