"Although investors are facing a challenging period with inflation proving sticky and interest rates continuing to rise, real estate’s potential for diversification shouldn’t go unnoticed"
Since the start of 2022, this vicious circle has presented significant challenges to the UK’s economy. In fairness, the return of inflation has been a global phenomenon and yet, it has proved particularly sticky in the UK, when compared to other major economies.
In the UK, the consumer price index (CPI) – the benchmark of inflation, compiled by the Office for National Statistics – resided in double figures for seven months from September 2022 to March 2023. Currently, it sits at 7.9%, showing that inflation is now on the decline, but not as quickly as desired.
Central banks around the world have responded in turn, attempting to suppress inflation through monetary policy. Chiefly, by hiking interest rates.
Since December 2021, the Bank of England has announced 13 consecutive increases to the base rate, taking it from a record-low 0.1% to 5%.
Consequently, the rising cost of borrowing has created disruption across the property market, leading to an earlier-than-usual summer slowdown. The latest data from the ONS House Price Index shows that average house prices are now £7,000 lower than they were in September 2022.
Moreover, higher interest rates have yet to reach their peak – with over a quarter of UK homeowners on a fixed-rate mortgage ending in 2024 soon to face drastically higher repayments.
Elsewhere, buy-to-let profits have fallen to their lowest level since 2007. Between rising mortgage rates, less-generous tax treatment and tightening regulations, the sector is weathering a decline in profitability.
Adjusting portfolios
As a result of the new macro realities impacting the investment landscape, diversification has become increasingly important to investors, with a recent study conducted by Shojin revealing that 37% of UK investors believe diversification is likely to play a bigger role in their investment strategies in the coming year.
The research suggests the current volatility is likely to give way to a rebalancing between traditional and alternative assets within portfolios, with nearly half (44%) of the investors surveyed in Shojin’s study saying their confidence in traditional investment assets, such as bonds, stocks and shares, has declined over the past six months.
Further, 36% stated that in the current climate, alternative assets – such as real estate or commodities – are likely to play a more prominent role in their investment strategy over the year ahead. One in nine (12%) said they are exploring a broader range of investment opportunities than they typically would, with this figure rising to 22% among the 18-34-year-olds.
Real estate asset classes: Ones to watch
Purpose-built student accommodation on the rise
The number of students attending UK universities is rising year-on-year, both on a native and international scale.
Last year, the government recorded a record number of students at university with 425,000 new places accepted last year. With technology expected to play an increasingly greater role in our lives, the level of expertise demanded by the job market is only set to increase and so the proportion of people going to university is not going to diminish anytime soon.
As the strong demand for purpose-built student accommodation (PBSA) continues to outpace the supply of available beds, rental growth prospects for the sector remain strong, which should drive further investment, despite the continued impact of high inflation and rising interest rates.
Build-to-rent outlook remains positive
The build-to-rent market has shown remarkable resilience over the last few years, demonstrating strong potential to alleviate the UK’s chronic housing shortage, while helping to meet residents’ evolving needs for home-working environments and outdoor space.
This emerging trend is also coinciding with a growth in demand in the private rented sector, accentuated by the ongoing exit of buy-to-let landlords as well as a delay in first-time buyer purchases, amid the current economic headwinds.
Recent data from CBRE revealed the BTR investment market remains robust, with £2.3bn of assets under offer and a healthy asset pipeline on the market. Despite a more subdued performance over the last quarter -symptomatic of the complex economic backdrop - the strength of its underlying fundamentals and the potential for attractive returns should continue to support increased appetite from investors.
Hotel investment landscape poised to gain momentum
Following a subdued level of interest in the market throughout 2022 which saw £3 billion of UK hotel transactions, data from Knight Frank revealed the hotel sector has welcomed a more settled investment market this year.
The sector’s ability to bounce back against the uncertainties of the economic environment has further reinforced its resilience. Indeed, the latest estimates suggest the weight of capital seeking to target hotel investment opportunities is expected to drive increasing transactional volumes, particularly during the second half of the year.
Although investors are facing a challenging period with inflation proving sticky and interest rates continuing to rise, real estate’s potential for diversification shouldn’t go unnoticed. But investors must play smarter and consider the changing social and economic environment around them to evaluate which type of property assets are likely to remain relevant in the years ahead.
