Some Sectors Will See The 'Buying Opportunity Of A Generation' In 2023

The coming year could be the buying opportunity of a generation, but income will be the main driver of returns across most major asset classes, according to Savills.

Retail warehouses and poor livestock land are likely to see the highest investment returns between 2023 and 2026 of 9.8% and 8.4%, respectively, the agent said in its 2023 cross-sector forecasts.

However, while poor livestock land is set to see significant growth in its capital value, because of increased emphasis on both food security and climate targets, retail warehouse performance will be driven by income returns over the next four years.

That is true of the vast majority of UK property subsectors, as real estate enters a new era where capital returns slow and income becomes the main driver of investment performance.

For residential property, Savills said much higher costs of debt are expected to suppress transaction levels and put downward pressure on prices in 2023 and, to a lesser degree, the first half of 2024.

It forecast mainstream house prices to fall by 10% at a national level in 2023, but for these losses to be made up by 2026.

In the commercial markets, despite rising interest rates and the cost of debt suppressing investment volumes and returns in late 2022 and early 2023, Savills said that continued occupier demand for prime, high-quality, highly rated sustainable offices and warehouses is set to deliver rental growth. 

Across commercial sectors, Savills predicted that the weak consumer environment in 2023 will lead to a softening in occupier demand for logistics from the peaks seen in 2020-21, but long-term near-shoring and shortening supply chains trends will support future demand for both logistics and manufacturing space. 

Q1-Q2 2023 will be tough for UK retail, but in the second half vacancy rates are expected to return to the downward trend begun in 2022, with some rental growth in some subsectors. 

High street shops in suburban and commuter towns are likely to outperform, given trends towards higher footfall, while bulky goods retail warehousing is more exposed given its dependence on the sale of big-ticket items. 

Finally, Savills said that lower office occupancy levels may be felt in terms of rising subletting, however, given the overwhelming lack of UK offices with high environmental ratings, and a fall in speculative development due to the tightening debt market, prime office rental growth remains deliverable.

“The second half of 2022 saw the most rapid repricing of market yields that we have ever recorded, and this sets us up for a return of activity and then a period of price stability later in 2023," Savills Joint Head of UK investment James Gulliford said. "In some sectors, for some investors, this could be the buying opportunity of a generation.”