Funding and forecasts
Optimism on the up – but economic obstacles remain
Despite demonstrable optimism across the market, it’s clear that respondents still have concerns about a potential recession and general economic volatility – again citing it as the number one barrier to investment at 53%. While our respondents remain apprehensive, this figure has dropped 8% since last year’s survey. While 2023 brought pain, it also highlighted remarkable resilience across the sector, and we should see a rebalancing and recovery in investor activity in 2024.
The biggest barriers to investment
Economic recession/volatility
Business rates
Additional tax restrictions
Accessing funding/high interest rates
Global shocks
Political instability
Not unrelated, a quarter of respondents selected global shocks in their top three barriers to investment. And with so much potential change on the horizon in the UK and far beyond – this is to be expected. While this year will bring a general election for the UK, more than 50 countries, which are home to half the world’s population, will also hold national elections. Of course, elections and resulting changes to governments, both expected or otherwise, can be catalysts for global events which would have a knock-on effect for UK real estate. Elections will also trigger more government spending.
Ongoing global events, such as the war in Ukraine and the tragic circumstances in the Middle East also remain front of the mind and contribute to investment anxieties. Such events also cause disruption to shipping routes resulting and global supply chain issues – affecting interest rates.
This year 35% of respondents said that high interest rates and resulting difficulty accessing funding were in their top three barriers. With 2023 having seen persistent inflation and the highest interest rates of the past 15 years, these results are as expected.
The outlook is more positive with inflation and interest rates headed in the right direction. For real estate, this translates to values rising and transactions increasing. For investors, timing it right in 2024 will be everything.
Economic forecasts
Private equity eyes real estate
Funding worries have eased slightly, and it’s positive that less respondents this year believe accessing funding will be more difficult in 12 months' time. What’s most interesting however, are the sources of capital that respondents believe will be most readily available to the real estate sector. 37% believe high-street banks will prove most accessible, coming in second place behind private equity (PE) and highlighting the caution that banks continue to exercise.
Whether PE funding will be more available to real estate developers in particular remains to be seen, but it’s predicted that PE deal count in the UK generally will remain steady in 2024 – increasing towards the end of the year and into 2025.
Linked to findings later in this report, assets such as the living sectors and industrials (due to the supply-demand imbalance) may make real estate attractive to PE.
of respondents think accessing funding will be more difficult over the next year, down from 46% 12 months ago
High interest rates have pushed up the price of debt, making private equity a highly sought-after funding option for real estate businesses. PE funding often comes with enhanced flexibility on investment terms, a strategic partnership, and the opportunity for long-term investment that allows developers to focus on growth of their projects, with less pressure on immediate returns. Meanwhile, 30% of respondents think UK investors or family offices will be the most readily available source of funding. For investors with no shortage of cash, now would be a good point to invest – with prices lower than they have been previously, and the expectation that they will rise, providing good returns.
Which sources of capital do you believe will be the most readily available for the real estate sector within the next 12 months?
Private equity
Foreign investors
Pension funds/institutional
High-street banks
UK investors/family offices
Challenger banks
Lenders a key driver to net zero
This year, 82% of businesses said they agree or strongly agree that solid environmental credentials are important to accessing financing from lenders. And this percentage will only grow. Strong and quantifiable ESG credentials are fast becoming a prerequisite for borrowing, as lenders must not only manage risks in their own operation, but in their financed portfolio. We have shifted from ESG being a ‘nice to have’, where businesses receive beneficial interest rates or longer terms, to a ‘must have’. Regulation will be a driver; the Financial Conduct Authority (FCA) has published guidance on anti-greenwashing and sustainability due to come into effect this year.
This shift places lenders as a driving force in the push towards net zero – and this is further highlighted in programmes such as NatWest’s Climate and Sustainable Funding and Finance, which sees the company pledge £100bn in funding between July 2021 and December 2025, with £10bn earmarked for EPC A and B residential properties.
agree strong environmental credentials are required in order to access finance from lenders
Market opportunity
Yields moved out in 2023. But most interesting has been the speed of the change, with similar percentage movements seen over a six-month period last year as were seen over a period four times as long during the global financial crisis in 2008.
A gap emerged between buyer and seller pricing expectations; transaction volumes decreased by over 40% in 2023 compared to the prior year. Investors have sat tight, collecting rent while waiting for a rebound or looked to other asset classes as the attractiveness of real estate diminished.
Do you expect to see a growth in the number of distressed assets in the next 12 months compared to the last 12 months?
Yes
No
Don't know
Our survey sentiment data points towards a busier transactional year, with over 50% being optimistic about the market over the next 12 months, as value stabilisation may bring buyers and sellers closer together. A similar number (53%) expect to see an increase in distressed assets, with over a third saying they are likely to invest. Valuations rebasing may bring buyers and sellers closer together and, while markets are nuanced, our respondents forecast a stabilisation and small growth in values next year. We have seen drops in values throughout 2023, up to 20% in some commercial markets. Overall, around 60% of respondents think 2024 will see values hold or increase 1-10%, this is from a lower base.
How do you expect the general value of real estate assets to change over the next 12 months?
Residential (average expected change +3.8%)
Decrease
No change
Increase
Commercial (average expected change +3.5%)
Decrease
No change
Increase
Damian Webb
Co-head of Restructuring, RSM