Key trends in a shifting market

Mark Payne identifies five factors that will have a major impact on the future direction of UK real estate. The UK real estate market is undergoing a period of significant transformation, influenced by a variety of factors. Traditional sectors such as office and retail continue to face challenges, while new opportunities are emerging. The rise of the private credit markets, shifts in investor focus towards alternative sectors and the ongoing distress in certain overseas markets are reshaping the landscape. London continues to be at the forefront of many international investors’ lists as a target for investment, and the growing demand for data centre sites highlights the dynamic nature of the market. Debt The main bank lenders are finding it difficult to compete with the rise of the private credit market. This is because the private credit market is not affected by the extensive regulations imposed on the banks, which has created a two-tier market. This enables private credit lenders to offer more favourable lending deals to borrowers than the traditional banks are able to. Ironically, many of the large deals now done by the private credit market rely on back-to-back lending by the traditional lending banks, who are able to do this type of lending with fewer restrictions than if they were lending the money directly themselves. Many equity investors, such as sovereign wealth funds and pension funds, have allocated capital to lending as the returns are better. The increasing amounts of capital secured on real estate by the unregulated private credit market ought to be a source of concern to regulators. On the other hand, there is a strong argument that the banking sector has been over-regulated in an over-reaction to the great financial crisis, making the European banks less competitive than the US banks and the private credit sector. More intelligent regulation is surely needed to create greater equilibrium in the lending market. Self-storage and build-to-rent With some of the mainstays of the traditional real estate market, such as offices and retail, proving less attractive to investors in recent times, many have been looking at alternative sectors. An interesting angle pursued by some is sectors which have developed to maturity in the US and Canada, but which are relatively undeveloped in the UK. Two key examples of this are build to rent and self-storage, both of which generally require experienced operators. The limited number of experienced players in these sectors are in demand from potential investors. With land prices too high and significant construction cost rises, very few sites for BTR developments have been commercially viable in the last two years, but there is a greater realism in the pricing of land at present and more willingness to “take the pain”, resulting in good opportunities for viable development for skilled developers in this field. Expect to see more joint ventures between investors and developer/operators in both these sectors. Distress in China and Taiwan With continued difficulties in their home countries, expect to see more Chinese and Taiwanese owners of UK properties quietly trying to sell assets here. They often own very attractive assets and may be pushed to offer them at more realistic prices than they have offered in the recent past. Attractiveness of London and the UK London is back at the top of many international investors’ lists as a target for investment. This may partly reflect the role which London investment has often played as a “safe haven” in a troubled world. It also reflects the fact that prices are seen to have corrected in the UK more transparently and more quickly than in continental Europe. For Asian investors, the rule of law is also a prime attraction for investment in the UK. They know that the English courts will not discriminate against them, and that their investments will be protected by a fair legal system. We take this for granted, but many foreign investors do not and value it highly. Data centre sites These continue to be in great demand by investors, developers, operators and hyperscalers, but are very difficult to find with the large and uninterrupted power supply which they require. The power supply in the UK is very constrained, as it is in much of western continental Europe. The new government’s decision to grant no new licences for drilling for oil and gas in the North Sea is likely to exacerbate the problem. Landowners with suitable sites with an existing power supply are becoming more aware of the potential value of their sites for this purpose. Data centre developers and operators are having to look beyond the prime areas on which they previously concentrated such as the Slough to Reading area to the north-west of London. Creativity may be required in finding sites and in finding power to go with them. Sites beside power sources of various kinds might be looked at especially if the energy source is reliable and constant such as nuclear or tidal energy. Mark Payne is a partner in the real estate practice group at Haynes Boone LLP