Real estate readies for second-half slowdown

Runaway inflation, political turmoil and a growing risk of recession have set a grim tone for the UK economy as the second half of the year gets under way – and real estate is unlikely to escape the hurt. Investment agents have tried to put a positive spin on the outlook for the coming months. In the London office investment market, a deal volume of £2.5bn during the second quarter was “respectable”, said the team at Cushman & Wakefield, but down by a fifth on the five-year average. Martin Lay, the firm’s London office capital markets head, said the amount of money targeting London was “still significant” and pointed to 12 assets launched to the market in the second quarter with a combined asking price of £4.1bn. Price expectations But others fear a greater freeze, pointing to problematic transactions such as the halted £720m sale by Norges Bank Investment Management of Bank of America’s UK headquarters at 2 King Edward Street, EC1, as a sign that the gap between seller and buyer price expectations is widening. “For the capital markets, I think the widely projected return to normality or released pent-up demand from the past 24 months will not materialise,” said Ross Blair, head of Hines UK. “Whether you use leverage or not, the repricing we have witnessed in the finance markets has to impact your near to mid-term view on cap rates and therefore the price you are willing to pay. I expect many will slow down their investing until things settle down. However, a volatile market can often be a good one to operate in, so long as you remain disciplined.” There are signs that some investors see real estate as a relatively safe haven. Fund transaction network Calastone said UK property funds saw their first monthly net inflows in four years during June. Head of global markets Edward Glynn said it was “probably too early to pop the champagne” but the turnaround “at least suggests investors think the property sector is a good place to hide”. Although a full-blown recession is not seen as inevitable, the Bank of England said this week that the UK’s economic outlook had “deteriorated materially” in line with global forecasts. Analysts at KPMG said in late June that there was now “a significant risk of a mild recession” next year. Fears overblown But at Toscafund, chief economist Savvas Savouri said fears were overblown – including in the real estate market. “Such are the numbers of those predicting the UK’s GDP numbers will tumble and bury the economy with them, one imagines they have clubbed together to pay for a pauper’s headstone inscribed with the simple words ‘RIP UK economy’,” he said. Savouri added that the UK’s labour and property markets, as well as its banks, “are fundamentally sound”.  “One is always confronted by the ‘Recession Infection Predicament’, as national economies are so interconnected,” he added. “While it was once the case that the US or EU sneezing saw the UK catch a cold, so much has now changed in the UK’s relationships near and far. Change has happened too in relation to the internal workings of the UK economy to make that adage redundant.” He continued: “Whatever awaits the US and EU, Chinese and Indian students, tourists and firms will continue to come to the UK, paying generously when here… In short, expect recession, yes – not in the UK, but in large swathes of the EU and the US.” If a downturn does come, the figures real estate can look to in leading the country out are now changing too, after a run of high-profile departures from Boris Johnson’s government. The resignations of chancellor Rishi Sunak, health minister Sajid Javid and housing minister Stuart Andrew have increased the pressure on Johnson as he faces various scandals – and could yet prompt his own resignation. On 5 July, Nadhim Zahawi, who oversaw the UK’s Covid-19 vaccine roll-out and was formerly secretary of state for education, was named chancellor. Melanie Leech, chief executive of the British Property Federation, said: “The country is facing significant challenges as the cost-of-living crisis continues to escalate, central banks grapple with keeping inflation in check and markets react to this ongoing volatility. The current political turmoil is a highly unwelcome distraction and creating further pressure at a time when we need a clear vision and strong and decisive leadership. Now is the time for stability in order to navigate the country through the coming months and beyond.”   To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews Photo by David Cliff/NurPhoto/Shutterstock (12986268m)