Investor sentiment in offices is turning a corner, according to the latest research from Investec, with the asset class now the third most appealing property type, up from seventh two years ago.
The firm’s Future Property report found that 35% of the 110 high-net-worth investors it surveyed selected offices as the most appealing investment opportunity. This was up from 23% when the survey was last carried out in 2022.
When it comes to actual investment, however, residential – and the living sector more widely – remains the asset class of favour. Investec found that 98% of the 110 HNWIs it surveyed were currently investing in residential.
Some 47% were investing in residential for sale and expected to increase investment, with 18% expecting to reduce or pause investment; 42% were investing in and planning to increase their spending in build-to-rent, with 17% expecting to reduce or pause investment, while 36% were investing in and planning to increase investment in the purpose-built student accommodation sector.
Residential for rent is a top investment priority for investors, with 96% of the 110 surveyed currently investing, compared with 84% in 2022, while PBSA has seen the largest rise in popularity with 87% investing in the sector today, compared with 71% in 2022.
Retirement living also features as a strong investment play in the report, with 27% currently investing and planning to increase their spending in the sector.
Overall, 72% of respondents were optimistic about UK real estate, with 99% believing that the UK is an appealing market. London remains the most appealing city – especially prime central London – followed by Manchester, Edinburgh, outer London, Birmingham, Glasgow, Leeds and Bristol.
“Today’s attitude to regional investment is better than it was 15 years ago, but there are still major imbalances,” said CEG investment director Andy Woods. “International capital will always come to London first. So, we believe that on a risk-adjusted basis, the regional returns are probably stronger. The rebalancing of the UK economy is a much bigger challenge than people like [former prime minister] Boris Johnson might let you believe; you can look at office property as a proxy for how difficult regional imbalances are.”
Almost two-thirds of respondents said they thought UK real estate capital values were at, or very near, the bottom.
Despite that opportunity to swoop on potential opportunities, however, the report also revealed a more risk-averse outlook from the HNWIs surveyed. Just 7% believed that opportunistic buying was the best strategy for risk-adjusted returns, down from 29% in 2022. Some 60% believe core-plus and core are the best places to put their cash.
Shivani Goolab, head of private client real estate at Investec, said there had been a “clear shift in sentiment” among respondents, which represented a “compelling case for UK real estate investment”.
“Although challenges remain, strong total return performance looks set to be driven by the supply/demand dynamics in multiple sectors, most noticeably residential, alongside the UK’s enduring appeal, asset repricing and an improving economic backdrop,” said Goolab.
She added: “Reflecting the value-add expertise of this cohort, the report reveals a major bounceback for the office sector and the growing opportunity for development, in particular the repurposing of older office assets.
“Where there is an opportunity to create prime office space, competition is high. Where there is the opportunity to acquire good value secondary or tertiary office space, or underutilised retail space, there is a clear appetite for repositioning, primarily into residential.”
One area where investors were willing to take on more risk was development. Activity increased by 23 percentage points in industrial, 16 percentage points in residential and 13 percentage points in office versus two years ago, found Investec.
However, developers also displayed a greater concern for almost all obstacles in the sector, with land costs being the biggest barrier to investing by far. Some 62% of respondents said it was an obstacle today, compared with 33% in 2022.
Supply chain issues were the second biggest barrier, followed by inflationary pressure and planning restrictions.
“While respondents’ views on the current investment landscape are more positive now than in 2022, they also demonstrate a belief that the outlook will improve further,” concluded Goolab. “There is still significant change to come in the UK. A general election looms and views on how far interest rates could fall will impact both developers’ and investors’ decisions.
“This report does, however, display a brighter outlook that cannot be ignored. If respondents are to be believed, the next 12-24 months will bring a higher level of activity and improved returns across all sectors.”
Photo © Marc-Olivier Jodoin/Unsplash
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