EG looks back at the trends, transactions and troubles that shaped a tough year for the real estate markets.
January
Happy new year! Well, maybe hold the “happy”. The IMF warns that a third of the world is likely to enter recession in 2023, and the UK is expected to be in for a particularly rough ride according to economists. In that context, few expect real estate to escape unscathed: index provider MSCI warns that London office values, for example, will need to fall by almost 30% to get transactions volumes back on track. Agencies ready themselves for a challenging year as the dealmaking market looks set to slump: Savills says it expects things to improve in the second half after a difficult start and some others, including JLL, initiate cost cuts in preparation. And in three stories that no one has heard the last of, Home REIT has its shares suspended as it enters an “enhanced” audit; flex office giant WeWork looks to job cuts to help it turn around its struggling business; and the MSG Sphere in Stratford gets the all-clear.
February
Home REIT’s woes will run and run over the course of the year, a messy and – as this story is published – as-yet-unfinished chapter in the short history of a REIT set up with the admirable aim of helping to solve the UK’s homelessness crisis. As auditors reveal the company has brought in less than 25% of its quarterly rent, the REIT receives an unsolicited approach from Bluestar, a firm with tangled ties to Home REIT’s former securities adviser. Spoiler alert: no deal will be struck with Bluestar. In another chapter of a long-running saga, Rachel Maclean (above) becomes the sixth housing minister in 12 months. The response from real estate is predictable – a polite welcome but a bemoaning of what has become a revolving door for the role. Stuart Baillie, Knight Frank’s head of planning, says: “How can we sensibly plan for any kind of future like this? This has been a revolving-door role for years; we need to find a way to keep housing ministers in post for longer than a few months if we are going to have any hope of making serious and sustained improvements to the fractured housing and planning system.” Spoiler alert: Maclean will last roughly nine months in the post. Hoping for a longer-term performance is the RICS, which kicks off a new hunt for a chief executive after its earlier search for a director-general failed to deliver.
March
A new CEO search isn’t the only change under way at the RICS. This month it launches a consultation on discounted cash flow valuations, part of an ongoing review into changes to the Red Book. DCF was a core component of Peter Pereira Gray’s independent report into valuations, published last year, which proposed its widespread use as the main method for valuation. JLL’s Ollie Saunders tells EG that if the move goes ahead, “the valuation profession will change for the better”. As agencies start to report their results for the final months of 2022, the pain from a dried-up deals market is made clear – at the big US agencies, combined capital markets revenue is $1.7bn (£1.3bn) lower in the final quarter of 2022 than in the final three months of 2021. With the first quarter of 2023 coming to an end, INREV finds the UK leading the European pricing reset, and attendees at MIPIM dare to wonder whether the all-important London offices market has hit the bottom…
April
Ouch. Investment in the central London office market is revealed to have reached £2.1bn in the first three months of the year, a drop of almost two-thirds year-on-year. JLL’s Julian Sandbach describes the result as “relatively muted”. The team at CBRE attempts a different spin, noting that a quarter-on-quarter rather than year-on-year perspective suggests the start of a recovery. Ed Bradley says: “As liquidity returns to the debt market and business and consumer confidence rebound, we should see volumes in lot sizes over £100m increase.” Keep everything crossed. A chunky take-private emerges as Blackstone makes a £700m move for Industrials REIT, continuing a wave of public-to-private M&A deals kick-started during the Covid-19 pandemic. In rather more downbeat dealmaking, Home REIT says it will start to offload assets as it attempts to stabilise its business, while WeWork says it is weighing up “a number of available alternatives” to boost its share price and allow it to keep trading on the New York Stock Exchange after receiving a non-compliance notice.
May
Expectations of a recovery in the deals market are quickly pushed out by agency bosses posting first-quarter results, with Colliers predicting “muted” transactional activity until the end of the year. “We all read the paper, this is crystal clear,” says chief executive Jay Hennick (above). “I hate to say it, but any moron should know that this is what happens out there.” His peers echo the sentiment – not in quite the same language – with CBRE’s chief financial officer Emma Giamartino saying the agency has given up on expectations of an economic recovery in the latter half of this year. And at Berkshire Hathaway’s annual shareholder meeting in Omaha, Nebraska, Warren Buffett and Charlie Munger warn of an “unpleasant” outlook for real estate amid a “hollowing out of the downtowns”. The meeting was the last for Munger, who died in November at the age of 99. In your monthly Home REIT update, AEW is appointed as new investment manager, promising “a thorough review of the company’s assets that will allow us to formulate a longer-term strategy for the entire portfolio”.
June
In a shock move, the RICS’s standards and regulation board resigns en masse, following the lead of chair Dame Janet Paraskeva. The resigning directors say they felt they had been “treated more as the enemy than as the regulator within the RICS”. The RICS tells EG that the SRB remains a vital part of the organisation, but questions mount over what now happens as the organisation finds itself at the centre of yet another governance scandal. At least it completes its search for a new chief executive, choosing former Knight Frank chief operating officer Justin Young (pictured above). As Goldman Sachs predicts that London office values will continue to fall, and M&G says the UK has won real estate’s “race to the bottom”, a major move by one of the capital’s most high-profile financial services occupiers underscores the shifting market – HSBC chooses to leave its tower in Canary Wharf to downsize in a return to the Square Mile. “I can’t express enough that the Docklands has not had its day,” says Shaun Dawson, head of insights at DeVono. “It’s just that it is in its infancy of change.”
July
Investment in commercial property continues to weaken, according to second-quarter figures from the team at Carter Jonas, which finds rolling quarterly investment at a decade low. The outlook is a mixed bag, says Ali Rana, head of national investment: “The economy is currently experiencing a mixture of positive and negative news, which is creating further uncertainty.” Secretary of state Michael Gove rejects controversial plans by Marks & Spencer to demolish and redevelop its flagship store on Oxford Street, W1 – a proposed scheme that found itself at the centre of real estate’s “retrofit or rebuild” debate. A ruling states there has not been a “thorough exploration of alternatives to demolition”, while M&S chief executive Stuart Machin describes the decision as “a short-sighted act of self-sabotage”. Tyler Goodwin, chief executive of Seaforth Land, says: “This is no time for a victory lap for the opponents to the demolition. That celebration should be saved for when policymakers, opponents and, indeed, the market collaborate to ensure M&S is empowered to deliver a world-class and profitable refurbishment that can then be a case study for a better future.” The RICS picks its interim standards and regulation board, while Home REIT looks to a new investment focus beyond helping the homeless.
August
After struggling with profitability and grappling with a changing office market during the Covid-19 pandemic, WeWork tells investors there is now “substantial doubt” about its ability to remain in business in its current form. Its shares, traded in New York since its second attempt at an IPO, tumble on the news and the company attempts to shore up its stock with a reverse split. The move is aimed at boosting the share price to regain compliance with a $1 per share minimum closing price required to be listed on the exchange. Industry figures argue that WeWork’s problems – many stemming from an older business model shunned by newer flex companies – will not define the sector’s future. In fact, several start eyeing WeWork’s sites as potential acquisitions as they map out their next steps.
September
London is in the final stages of absorbing capital corrections, says the team at BNP Paribas Real Estate, having done so faster than almost any other European market. “The London office sector is offering a very rare entry point for investors for either repriced core product, or those with the means to spend capex to reposition assets into the core market,” says Fergus Keane, head of central London investment markets. “For a decade it has been a seller’s market, and that has now flipped, with buyers holding the upper hand, particularly if you are an all-equity player.” Industrial land values show some tentative signs of recovery, reaching an average of £1.8m per acre, up from £1.5m at the start of the year, according to Colliers. But while some markets show that a corner is being turned, much of the other news this month feels more downbeat. Inland Homes heads for administration after breaching covenants on bank loans. PBSA investment is found to have dropped by 30% from a record 2022, although to a still-respectable £2.5bn. And after years of trying to build momentum around a new channel for real estate investment, IPSX starts the process of winding down. “It’s easy to see this as a failure,” chief executive Roger Clarke (pictured above) says. “But actually it’s extraordinary how much we’ve achieved in terms of how very hard it is to build a 21st-century digital stock market with all of the various stages that need connecting.” Birmingham City Council, overseen by chief executive Deborah Cadman, becomes the latest authority to declare itself effectively bankrupt, with an £87m gap in its budget.
October
Party conference season. Labour pledges to build 1.5m homes, unlock brownfield sites and create a new generation of new towns by “bulldozing” through the planning system. Real estate likes what it hears. Grosvenor chief executive James Raynor says the plans are “ambitious” and “chimed with a lot of what we are wanting to achieve”. The Conservatives’ conference, meanwhile, is dominated by the scrapping of the northern section of the HS2 rail line. Real estate reacts with rage: “The decision will really hurt not only Manchester, but the North,” says Capital & Centric’s Tim Heatley. “More and more people are setting up businesses and building a life in the North as London overheats, so putting the city on a sideline can’t be the answer.” The closure of vehicles by St James’s Place and M&G raises fresh questions about the future of open-ended property funds, with AJ Bell’s Ryan Hughes saying “the writing has been on the wall since they suspended again in the depths of the Covid crisis”.
November
WeWork files for bankruptcy. Leases are earmarked for rejection. Fingers are pointed. Restructuring plans are mapped out. Rivals wonder out loud which sites or businesses might now be up for grabs. Rachel Maclean loses her housing minister post in a reshuffle, with Lee Rowley (pictured above) returning to the role after holding it for just 48 days last year. Simon McWhirter, deputy chief executive of the UK Green Building Council, speaks for many when he says: “Just as no company could hope to deliver strong results if they’d had 16 changes of top executive in 13 years, the unprecedented turnover of ministers leading our portfolios has hampered progress in the built environment at the very time that we needed to be accelerating towards net zero.” Number crunching by EG reveals that Home REIT’s sales of assets have lost shareholders £100m. And almost a year after it was approved, London mayor Sadiq Khan stops plans for the Stratford Sphere in their tracks.
December
Let’s end with some glimmers of hope. The City of London Corporation reaches an annual record for signing off major retrofit planning applications – its 17 schemes represent half of all such permissions granted across the whole of London this year. “There will always be the potential for new-builds and there is no one-size-fits-all approach to planning,” says planning committee chair Shravan Joshi (pictured above). “But we will increasingly support lower-carbon alternatives and assist developers in putting carbon considerations front and centre when preparing an application.” And Cushman & Wakefield predicts the recovery is nearing for the EMEA market. “As we look ahead to 2024, our forecasts indicate commercial real estate markets are approaching an inflection point after a turbulent period. Though economic growth remains subdued for now, the tide seems poised to turn,” says Sukhdeep Dhillon, the agency’s head of EMEA forecasting. With Gove calling in the Stratford Sphere for his own review, perhaps even that scheme too could soon circle back around.
