UK Real Estate to See Marked Recovery in 2022, says CBRE

  • Total returns for all UK property forecast at just over 6%
  • UK office investment expected to rise c.20% in 2022
  • Build to Rent investment to increase by c.65% in 2022
  • Record M&A activity anticipated across Operational real estate sectors

A growing economy and a strengthening of the labour market will provide a positive backdrop for real estate in 2022, with total returns for all UK property forecast at just over 6%. This is according to the UK Real Estate Outlook, published today by global real estate advisor CBRE.

In the near term, rising Covid-19 cases, including the new Omicron variant alongside supply bottlenecks and rising energy prices are the main risks to the pace of recovery and the inflation outlook. However consumers maybe spending their savings faster than expected, therefore boosting consumption growth.

ESG Impacts

The ESG agenda will continue to be a priority for the property industry with the tightening of regulation across all parts of the UK set to continue, as governments aim to make progress towards ‘net zero’ emissions targets. The new Heat & Buildings Strategy, UK Green Taxonomy and Sustainability Disclosure Requirements will be the main strategic drivers of change.

Demands for more precise and rigorous valuation of sustainability features will grow during 2022 as investors seek to identify buildings that merit a ‘green premium’ and avoid those that suffer from a ‘brown discount.’ This is likely to drive more collection of sustainability data, especially energy data.

Office Outlook

In the office market, take-up will return to historical levels in 2022 driven by healthy levels of job growth and the release of pent-up demand. More flexible working patterns and the drive to attract employees back to the office will mean that occupiers place a greater emphasis on curating great ‘work experiences’ through integrated space, technology and service.

The level of global equity targeting London office property stood at a near-record level of £40.13bn at the end of November 2021, as appetite for UK investment stock remains high. Private investors represent the largest proportion of demand, implying that core assets are likely to remain in high demand. The gradual loosening of travel restrictions will remove barriers to entry for many overseas investors and as a result, CBRE forecasts that UK office investment volumes will see a healthy year-on-year rise of c.20% in 2022.

Logistics Outlook

CBRE anticipates that UK logistics market will remain strong with rental growth likely to continue throughout 2022 in all UK regions, due to a significant demand and supply imbalance that will not be addressed in the short-term. However, the market does have its challenges, including planning, labour availability, rising construction costs, as well as pressure to address sustainability and carbon reduction issues, as part of developer’s specification proposals.

Retail Outlook

For the retail sector, recovery is already underway and CBRE expects this to continue, strongly boosted by the highest levels of savings on record built up during the pandemic. Improving footfall, retail and leisure spend in 2022 will strengthen the occupier market. With a rebasing of rental and capital values, investors will continue to re-engage with the sector. Whilst the market continues to recover, downside risks still remain in the form of future COVID-19 outbreaks, global supply chain disruptions and consumer price inflation.

Residential Outlook

The residential market has remained resilient over the pandemic period and CBRE expects this will continue into 2022. With a strong return from the investment market and with interest widening from standard multi-family housing to include single-family housing, co-living and affordable housing.

Despite its general resilience, Build to Rent (BtR) investment levels were lower than expected in 2021. Deals were hampered by the continued travel restrictions and rising construction costs, which affected
the ability to transact on forward funds. As these impediments ease, the strong underlying sentiment will lead to a surge in activity. This will be boosted by favourable debt markets, with diversifying lenders looking to increase their residential allocations. CBRE forecasts suggest BtR investment will increase by around 65% in 2022, whilst overall residential investment is expected to increase by 10%.

2022 will also be a strong year for co-living boosted by demand from the return to the office and renewed business travel. Investors, operators and tenants alike are attracted to the ESG attributes of co-living schemes, such as combating loneliness - the sense of community which co-living encourages.

Hospitality Outlook

For the hospitality and leisure industry, operators across the sub-markets are at various stages of recovery and confidence is growing. There is a wall of capital targeting the sector with surplus of demand over supply for operational platforms. Visibility of the recovery and understanding of future performance will continue to be key predictors of investment appetite and pricing in each sub sector. Investors able to assess recovery ahead of the curve have the opportunity to benefit from both trading upside and pricing improvements.

CBRE anticipates record M&A activity across Operational real estate sectors, particularly across leisure and pubs as most sectors have positively emerged from the pandemic. Additionally there has been an increase in investors with strong capital reserves seeking to take direct operational risk within the leisure market.

Jen Siebrits, Head of UK research, CBRE
Whilst the challenges of the last year are not quite yet behind us, with the Omicron variant of Covid presenting new uncertainties, the property industry can still go into 2022 with a renewed sense of optimism. Buoyed by a growing economy, real estate has real impetus for growth in 2022. The current spectre of inflation will subside, proving to be transitory rather than long lasting, with only modest rises in interest rates necessary.

Alongside a real estate recovery, we can be certain that sustainability will take centre stage this year. Occupiers across all real estate sectors are focussing on green buildings and it is evident that sustainability is also playing an increasing role in investor strategy.
Jen Siebrits, Head of UK research, CBRE