The Market Is Optimistic, But Economic And Environmental Concerns Remain

There is a renewed sense of optimism in RSM UK’s annual Real Estate 360 survey, which questions real estate professionals across the UK. For example, 80% of respondents were optimistic about the sector over the next three years and, overall, respondents believe that the value of UK residential and commercial property is expected to rise approximately 3.5% over the next year.

However, despite this positive outlook, respondents’ answers still showed some significant concerns, RSM UK's Head of Real Estate and Construction Stacy Eden said.

“The market today is challenging, but it is better than this time last year following the fallout of the mini-budget,” he said. “There’s stability and a sense that values are plateauing rather than falling. But even though there is a downward trend in interest rates predicted, we shouldn’t hide from the fact that the number one concern is economic recession.”

When asked about the biggest barriers to investment, while fewer respondents selected economic volatility than in 2023, 53% versus 61%, it still ranked as the number one cause. Accessing funding and high interest rates were the next barriers chosen by most respondents, followed by business rates and global shocks.

Regarding regions, 48% of respondents said that London will attract the most residential property investment this year, compared to 38% choosing the city in 2023. 

“Whenever there is economic uncertainty, people focus on London and the South East, which is clear in the results,” Eden said. “They look for safe markets.”

When asked about investment in commercial property, almost the same proportion of respondents selected London as the location that will see the most investment in 2023, 47% this year versus 46% last year. However, interest in the North West has fallen, selected by 14% of respondents this year compared to 19% in 2023.

Overall, 53% of respondents think the number of distressed assets is rising. RSM Partner and co-Head of Restructuring Damian Webb said this is due to more people recognising an asset is distressed, following an approximate 20% drop in values across commercial property since summer 2022.

Despite this view of the market, the proportion of respondents who think access to funding will be more difficult in the next 12 months has almost halved, going from 46% to 25%. Webb said this result reflects conversations he is having with lenders.

“Banks are feeling more confident that the market has stabilised,” Webb said. “The fundamentals are there to allow for investment. We’re seeing a high number of distressed assets, but this is generally where there is a structural issue with certain asset classes or where valuations and the level of leverage are incorrect.”

Respondents highlighted retail as a sector likely to see the highest level of negative growth, with 30% choosing this asset class and 25% choosing office. This is partly due to landlords increasing rents over the last two decades, Webb said. Retail sales over Christmas were down 3%, and several high-profile retailers are exploring restructuring, which is impacting the market.

“On top of that, a lot of secondary retail is facing ESG compliance challenges, which is also the case with secondary offices,” he said. “Refurbishment and conversion costs are high, which also impacts value.”

When it comes to decarbonising real estate, respondents highlighted many barriers. These included a lack of cost-effective tech solutions, a lack of landlord willpower to invest in environmental solutions and an overall lack of understanding in the term itself and what it requires.

“What this suggests is that there are different drivers for different real estate organisations,” Eden said. “It also reflects that decarbonisation is still relatively new, and people are uncertain about the best approach to take.”

Meanwhile, 51% of respondents agreed that the UK real estate sector is making quick enough progress to reduce its carbon footprint, compared to 41% in 2023.

Respondents clearly see environmental performance as important to investors, with 82% agreeing that businesses need to have strong environmental credentials or plans in place to access financing.

Finally, the results demonstrated a clear interest in generative AI. A significant 83% of respondents who have invested in AI believe it will result in significant returns on investment for their business. However, only 19% have currently invested in it. A further 39% are planning to in 2024.

“Many of the processes surrounding real estate are manual, from legal processes to property management,” Webb said. “At some point, AI will be a game-changer for many elements of the sector.” 

Download RSM UK’s annual Real Estate 360 survey for the full results and analysis.

This article was produced in collaboration between RSM UK and Studio B. Bisnow news staff was not involved in the production of this content.

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