COMMENT In times of economic turbulence, businesses typically stick to what they know best in the hope of mitigating risk by utilising their strong relationships and deep knowledge to unlock opportunities in their key target market segments.
As a lender, an asset’s location is often as important as the quality of the sponsor. London is a market we know incredibly well and we remain confident in its resilience on the global stage, even in the face of significant macroeconomic headwinds.
A unique market
London benefits from a number of defensive characteristics versus other parts of the UK due to its position as the dominant financial and cultural hub. While companies may be reducing their quantity of office space, they will likely retain a headquarters in London at the expense of regional satellites. Savills figures show that across 30 deals in 2021 and H1 2022, professional sector companies that moved offices reduced their square footage by 28% in the regions, whereas in Central London they are growing their office footprints.
While the future of HS2 hangs in the balance, the capital has seen multibillion pound regeneration and development projects such as Battersea Power Station and Crossrail, which have both opened in the last few months, as well as the ongoing regeneration of the E14 precinct by Canary Wharf Group, Brent Cross by Related Argent and Wembley by Quintain. These significant commitments from the government and major global real estate players provide comfort to less established businesses considering their own investments in and around those locations.
Additionally, the weakness of the pound has piqued the interest of international investors looking to capitalise on favourable exchange rates, with London still seen as a safe haven for capital deployment over the long term.
The Investec Economics team noted that “the decline in sterling relative to its major currency pairs over the past year continues to create unique opportunities for overseas investors to gain access to the lucrative central London market at more favourable rates”. Across all sectors, a downturn sees a flight to quality as investors hope to limit risk and unlock value.
Opportunities in London living
The prospects for the capital’s living sector look especially resilient.
The build-to-rent sector is characterised by London’s acute housing shortage. This imbalance is unlikely to change as a result of planning challenges and the cost of land – headaches for our clients but drivers of higher valuations and inflation-linked income, which are key in the current climate.
The exodus of people leaving London during the pandemic seems to be over and people are returning to the office as the reality of the cost and duration of a long-distance commute hits home.
The threat of a recession is accelerating the trend. A recent LinkedIn study found that three-quarters of executives intend to rein in flexible working because of the worsening economic backdrop. The expectation that this outflux of people and jobs would be permanent hasn’t materialised, just as it didn’t following the Brexit referendum in 2016.
We have clients in the BTR sector that have seen rental growth of between 10-15% in the last year in London, while rising energy costs are attracting renters to schemes where bills are included as a means of hedging against further increases, as well as providing certainty over their outgoings.
The student sector
Purpose-built student accommodation is another sector benefiting from a significant supply-demand imbalance. London has the UK’s highest number of world-renowned academic institutions, with a higher proportion of international students compared with other parts of the country.
In the 2022/23 academic year, there are expected to be 280,000 full-time higher-education students seeking accommodation in London but there will be just over 102,000 PBSA beds to rent – a shortfall of almost 178,000.
In a sea of uncertainty, shrewd and astute investors have and will be able to capitalise on distress and opportunities in London but also further afield. But they will need funding partners who have in-depth market knowledge, can provide flexible and customised solutions, and have the ability to act quickly.
Ed Boughton is part of the real estate team at Investec
