UK Mid Year Market Outlook 2024

So far this year

• Inflation has come down steadily to the Bank of England’s 2% target and the UK has successfully navigated its way out of the recession from the end of last year. Real incomes have started to grow and both consumer and business confidence continues to improve.
• Tight labour markets and minimum wage indexation mean that wage growth remains above long-term average levels. This in turn has led to stubborn core components of inflation, causing the Bank of England to keep interest rates on hold thus far. 

What’s still to come

• We still expect some volatility in the headline inflation rate for the remainder of 2024. Given its data driven approach, the Bank of England will maintain a cautious approach to cutting rates. We expect the first cut in August followed by one more by the end of the year.
• This will limit, but not prevent a reasonable recovery through 2024. The economic backdrop will strengthen and align with the long-term pre-pandemic average in 2025.

So far this year

• Real estate investment returns have improved, with positive total returns recorded at an all property level. Yet the performance of different property types continued to diverge during the first half of 2024.
• Transaction volumes remained low in most sectors, with higher interest rates weighing on real estate market activity. However, there has been M&A activity this year in the UK listed real estate sector.

What’s still to come

• Investment activity will increase gradually as more investors seek to reposition portfolios and deploy capital to take advantage of the rebasing of real estate prices.
• We expect loan originations to increase further. While industrial & logistics, data centres, and the living sectors are favoured, there is debt available in all sectors for high-quality assets with strong sponsors.

So far this year

• Biodiversity Net Gain became a requirement for planning permission for new developments. This regulation does not appear to be preventing or significantly delaying developments to date, but has led some developers to adapt their plans to reduce the cost of biodiversity mitigation. 
• Limited grid capacity and slow pace of reinforcement is delaying the decarbonisation of the energy grid and real estate development. 

What’s still to come

• When the Sustainability Disclosure Requirement (SDR) is introduced in December all FCA regulated firms will have to adopt new sustainability-related labels and disclosures. The SDR is intended to prevent greenwashing and facilitate investment into sustainable products.
• The Labour Government has indicated it will introduce higher minimum energy efficiency standards by 2030 for private rented domestic properties. We expect this could become law in 2024, prompting landlords to start refurbishment work. 

So far this year

• Occupier demand for high quality, core located offices remains robust. However, the market is challenging for poor quality secondhand stock, with some repurposing of obsolete stock underway. 
• Investment turnover is still muted and liquidity in the first half of the year has been within smaller lot sizes. Pricing has begun to stabilise in some, but not all, UK markets.

What’s still to come

• Development completions will be relatively strong in 2024 but construction starts are unlikely to continue at pace due to the costs of debt and construction remaining high.
• Once interest rates decrease and yields stabilise, the investment market (particularly for core assets) is likely to pick up as returns become more attractive.

So far this year

• Occupier demand has improved since the start of the year, but there remains some caution in the market. The vacancy rate has grown; however, the development pipeline has continued to moderate in response to this.
• Investment has remained below the long-term average, as investors continue to be selective in their acquisitions. There has been no change to pricing in the first half of the year.

What’s still to come

• Take-up in the second half of the year is expected to be consistent with the first half. Further vacancy rate rises are anticipated, but the measure is likely to remain below the 10-year pre-pandemic average at the end of the year. 
• More stock will come to market, and full year investment volumes are expected to be on par, or marginally ahead of last year. However, with limited base rate cuts anticipated, pricing is likely to remain largely unchanged.

So far this year

• Consumer confidence has continued to grow, but this is yet to translate to improved sales performance. The occupier market continues to display resilience, and the all-retail vacancy rate has remained stable quarter-on-quarter.
• With limited stock coming to market, investment volumes have been relatively subdued in the first half of the year. Improving levels of investor interest has resulted in the prime Retail Park yield sharpening 25bps, with all other sub-sector yields remaining stable.

What’s still to come

• Retail conditions will continue to improve, with rising consumer confidence and an uptick of retail sales volumes. The sector’s overall vacancy rate is expected to remain stable, but certain locations will outperform including Central London, prime Shopping Centres, and Retail Parks.
• Investor sentiment is expected to remain relatively positive in the second half of the year. Reduced financed costs could see further pricing improvements and more stock coming to market for certain retail sub-sectors.

So far this year

• The sales market has improved throughout 2024, with both demand and house price growth rebounding. Mortgage approvals are up 30% so far this year compared with the same period of 2023, and annual house price growth was around 1.3% at the time of writing. 
• In contrast, the rental market has been more muted. This reflects lower inflation and stretched tenant affordability, which is dampening rent growth. After 33 consecutive rises, the ONS recorded the pace of annual rental inflation slowing for the first time earlier this year.

What’s still to come

• Renewed uncertainty about interest rates has impacted sentiment most recently, but this will be temporary. We continue to forecast an initial base rate cut in Q3 2024 which will be a boon for the housing market. On balance, we have upgraded our forecast for UK house price growth to 1% in 2024.
• Stretched affordability will continue to exert downward pressure on rents for the remainder of the year. However, this will take time to feed through. As such, we continue to forecast strong, but lower, rent growth of 6% in 2024.

Affordable Housing

So far this year

• Investment activity has increased across the sector, with stock rationalisation and stock transfers particularly active.
• Yields, particularly for rented product, continued to soften across the sector at the start of the year, but at a slower rate than 2023.

What’s still to come

• Affordable housing will face the same challenges as other residential segments for the remainder of 2024. Those specific to the sector include reduced activity from traditional registered providers who will continue to focus on their existing portfolios. In addition, the 2023/24 rental cap will continue to negatively impact finances and hamper future investment.
• However, for-profit providers are increasingly active. The strong momentum at the start of the year means we maintain a positive outlook for the remainder of 2024.

Purpose-Built Student Accommodation (PBSA)

So far this year

• Demand for higher education has been robust, particularly from domestic and non-EU international students.
• PBSA investment has been strong so far in 2024, which has been boosted by several larger portfolio deals. Strong growth expectations continue to counteract any further yield movement.

What’s still to come

• Rental growth projections for this letting cycle are strong, and we forecast growth of 5-10%. This is positive for investors and developers but may mean many domestic students are priced out of some PBSA schemes.
• Investment activity is expected to increase throughout the rest of 2024. However, viability will remain challenging in the face of the abolition of Multiple Dwellings Relief, along with higher debt costs and more stringent building safety regulation.

Hotels

So far this year

• Average daily rate (ADR) has seen significant growth over the past few years, achieving record levels in 2023. Forecasts for 2024 suggest more moderated ADR growth going forward. 
• Tourism demand continues to remain strong in London, the key hotel destination in the UK, with year-end forecasts indicating record levels of overnight visits for 2024. 

What’s still to come

• Positive monthly occupancy data shows signs of exceeding pre-COVID levels in London and the Provinces by the end of 2024 for the first time.
• Cost control and a focus on EBITDA conversion requires proactive management with continuing high costs of payroll, food & beverage, and utilities.

Leisure & Pubs

So far this year

• Costs pressures persist and many cinema operators struggling with occupancy levels which remain low. 
• Pub pricing continues to drive turnover growth, offsetting volume declines.

What’s still to come

• Improved liquidity and falling base rates later in 2024 will likely lead to an uptick in activity. 
• The participation of England and Scotland in Euro 2024 competition will likely boost overall summer trade, particularly in pubs.

Healthcare

So far this year

• Healthcare investment activity has started to return in 2024 with volumes so far double that of the same period in 2023. 
• The flight to quality for healthcare assets continues, but we are already seeing materially increased demand for value-add assets.

What’s still to come

• The flight to quality for healthcare assets will continue and we are already seeing materially increased demand for value-add assets with a number of large-scale elderly care opportunities currently in the market.
• While elderly care remains an active segment of the market, there has been a surge in private hospital investment activity, and we expect this to continue following the refinancing of Medical Properties Trust and multiple investment opportunities in this sector of the market.

Senior Living

So far this year

• The sale of new homes in 2024 have been steady but subdued. This reflects challenges in the wider residential market as many prospective buyers are struggling to quickly sell their current property. 
• Still,  established villages are outperforming, highlighting the importance of the "community".

What’s still to come

• Operators are now looking to capitalise on the wider urban masterplans and forming more intergenerational living spaces.  And more operators are offering a rental option as a key investment option.
• Recommendations within the report submitted by the Older People's Housing Taskforce would support growth in the sector across a range of price points. 

Roadside & Automotive

So far this year

• In the operational Petrol Filling Station (PFS) market, demand from purchasers has remained strong. This has been driven by high fuel margins and a drive to secure ‘future proofed’ sites suitable for electric vehicle charging combined with a more traditional petroleum & convenience offer.
• In H1 2024, the number of electric cars now on UK roads reached one million for the first time. 

What’s still to come

• Despite the economic and political headwinds, operators in the PFS market continue to perform well and we expect investor appetite to return for well-located assets that are ‘EV ready’ and backed by strong tenant covenants. 
• CBRE research indicates that average annual returns are 377 bps higher than the long-term average if you invest at the trough of the market across all property types. H2 2024 is likely to present investors with opportunities to acquire long-term strategic assets. 

Self Storage

So far this year

• 2024 has already reached a record investment volume, however debt remains a key underwriting consideration. 
• Over the last 12 months, occupancy rates have dropped and demand has returned to normal following exceptional performance during the post-pandemic period.

What’s still to come

• Operators remain optimistic despite a softening residential market and the cost of living crisis.
• We expect the self storage sector to continue to receive interest from investors seeking to benefit from a robust trading environment.

So far this year

• Available data centre space in London is at its lowest point (119MW) in six years, due to high demand mostly on the part of hyperscalers.
• A lack of necessary resource, namely available power and appropriate land, are making it difficult for providers to build new data centres.

What’s still to come

• Take-up is expected to outstrip new supply delivered in London for the third consecutive year.
• London take-up in 2024 will rival the all-time high recorded in 2022, due largely to demand from hyperscalers, but also newer companies that require AI infrastructure.

So far this year

• Take-up for life sciences companies in the first half of the year was modest at 130,000 sq ft. While this is generally in line with historic trends, it also reflects a lack of readily available lab space. 
• Venture capital funding appears to have stabilised and is projected to exceed 2023 levels. If these levels continue, it could potentially reach around £3.43bn, making it the third-largest year on record.

What’s still to come

• The investment market is anticipated to rebound. Following the partial sale of 1 Triton Square to Royal London, we observe signs of investors and developers shifting focus away from the delivery of projects. They are likely to seek new investment opportunities in the sector or exit their holdings upon project completion.
• We are beginning to witness the emergence of a two-tier market for life sciences spaces, with both repurposed office spaces and purpose-built lab spaces becoming available. Both types will serve distinct purposes, with more affordable sites offering cash-conscious biotech's viable options for relocation within strong ecosystems.