The House View 2023

Below we provide a snapshot of the latest trends, predictions and forecasts for global property markets.

UK residential market –cost of borrowing weighs on activity but higher price brackets resilient

Although the Bank of England (BoE) has raised interest rates by another quarter point to 5.25%, there’s a sense after an unexpectedly large fall in inflation from 8.7% in May to 7.9% in June that we may be nearing the peak of the current rate hiking cycle.

While more pain is set to enter the system – with the BoE warning up to 4 million mortgage accounts are likely to renew at higher rates by the end of 2016 – the arrival of a rate ceiling will be critical in bolstering buyer confidence and allowing effective planning.

Even with improved sentiment, affordability will continue to be stretched, with our latest sentiment survey highlighting both concern about the cost of borrowing and the real impact it has had in reducing individuals’ spending power.

It means that we expect transactions to fall, and house prices to decline by 10% over the remainder of this year and next. Strong wage growth, low unemployment, the forbearance of lenders and availability of longer fixed-rate mortgages are the reasons that we do not expect a steeper decline.

Get in contact: Tom Bill, head of UK residential research

UK agriculture - farmland prices at record levels but hitting peak

The price of bare agricultural land in England and Wales rose by 1% to hit another record high in the third quarter of 2023, according to the latest instalment of the Knight Frank Farmland Index.

On average, an acre of land is now worth £8,951. This represents an 8% rise on the year, just ahead of the latest inflation figures of 6.7%.

It does, however, appear as if the farmland market is at, or very close, to its near-term peak. Average values may hit £9,000/acre by the end of the year, but after that 2024 looks set to be a period of consolidation as supply and demand become more balanced.

The volume of publicly advertised farmland is up by a quarter so far this year to around 80,000 acres, but this is still well below historical levels and there are few signs of a vast increase over the next 12 months, despite ongoing reductions in the amount of direct support payments that farmers are receiving from the government.

Demand remains strong, particularly from farmers who have sold land or had it compulsorily purchased for housing developments and infrastructure projects like HS2 and need to “rollover” any capital gains into new investments. In localised cases, this has driven prices over £15,000/acre.

Environmental buyers are still in the market but are reportedly becoming slightly less active due to a lack of clarity around the development of nature-based finance frameworks in the UK.

Get in contact: Andrew Shirley, head of rural and luxury research 

UK industrial and logistics – improving rental growth prospects in higher interest rates environment

A higher for longer interest rate environment now anticipated, though improving rental growth prospects will help boost returns and investment into the sector.

Persistent inflationary pressures make it likely that the BoE will need to make further interest rate hikes. Swap markets are now pricing in further rate hikes this year, with rates expected to peak at around 5.3% by year-end (from 4.5% currently). The increased likelihood of further interest rises will mean borrowing costs remain high and could increase over the short to medium term.

Rental growth expectations have risen. Average rental growth expectations for the UK have been revised from a CAGR of 2.6% (2023-2027) forecast in Q4 2022 to 3.1% (according to the Q1 2023 forecasts).

Rental growth expectations have been revised up across all regions except for London. The largest upward revisions have been in the North West, Yorkshire and Humber and the North East regions.

Get in contact: Claire Williams, head of UK and European industrial research

UK Capital Markets – opportunities available despite economic headwinds

Geopolitical and economic headwinds are expected to impact global growth this year and subsequently commercial real estate (CRE) investment.

The UK will not be sheltered from these headwinds, however, the fundamentals for the UK CRE market remain.

The UK CRE market is underpinned by currency benefits, relatively attractive yields compared to core mainland European locations and its liquid, safe-haven profile.

Our Knight Frank Capital Gravity forecast expects the UK to be the top market for cross border investment within the EMEA region this year and the second most invested market globally for cross border investors, behind the US.

Globally, the UK is forecast to be the top market for office investment in 2023, the second market globally for Residential, Retail and Hotel investment and the third market globally for Industrial investment.

Get in contact: Victoria Ormond, head of Capital Markets research

UK retail – riding out the storm

Retail sales have held up far better than virtually anyone anticipated – and are likely to continue to do so for the rest of the year, despite the macro-economic backdrop.

As all-consuming as the cost-of-living-crisis narrative is, it fails to fully reflect a consumer market that is highly complex, with an intricate network of moving parts.

The widely-anticipated slowdown at Christmas simply did not materialise (Q4 2022 retail sales values in fact grew +3.6% y-o-y), nor was this a “last hurrah” as many economists lazily concluded (Q1 2023 retail sales value growth accelerating to +5.6%).

Retail sales volumes, on the other hand, do reflect the negative effects of inflation (Q4 2022: -6.3%, Q1 2023: -3.8%). Effectively, this means that consumers are tightening their belts in so far as they are buying less products, but are still spending more money. Although far from ideal, this is infinitely more palatable for the retail industry than the situation during COVID when we were in the unprecedented position of both values and volumes collapsing (e.g. Q2 2022 values -7.9%, volumes -12.4%).

Get in contact: Stephen Springham, head of retail research 

London office markets – resilient take-up despite slow economic growth 

In the first half 2023, there has been just over 4m sq ft of take-up with almost two-thirds of transactions for the best quality, new and refurbished space.

Despite the economic uncertainty, near-term leasing transactions are supported by 3.3m sq ft of deals under offer, and 9m sq ft of active requirements for space to be occupied in the next 12-18 months.

Over the longer-term (2025-27), we expect the ‘supply squeeze’ and pent-up occupier demand to generate greater levels of lettings transactions and fuel growth in prime rents.

Get in contact: Shabab Qadar, London research

UK residential development – new-build development activity for sales schemes will pick up when affordability pressures ease

This is most likely to happen by the end of Q2 2024. The pause in interest rates, slowing inflation and fact that build costs are levelling out has boosted sentiment, but in the absence so far of positive policy direction from the government, the sector is turning to pre-selling units into the private rental sector and offering incentives to buyers to see it through the downturn. This is supporting headline pricing, as is international demand, particularly in the prime and super-prime segments.

Planning obstacles have worsened, and this, combined with the weaker sales market, means that stock levels will fall further into next year. In the short term, developers either with a presence in more affordable markets, such as the north of England, or those operating at the top end of the market, will be best placed.

Living Sectors: BTR: Private renting continues to expand, with BTR growing and diversifying to include single-family rental and co-living. Higher mortgage rates mean an increasing proportion of the population is looking to rent, leading to high occupancy levels and rental outperformance. BTR is still well below mature market capacity (UK 2.8%, 6.6% London) vs long term expectation of 30%).

Student: a more established market, but assets also linked to a demographic rather than economic cycle. Long term student growth, coupled with a shortage of beds, is driving capital into the sector. The unmet demand is likely to grow given elevated build and finance costs are limiting construction. This is also impacting PBSA rents which are expected to increase by more than 5%-6% for the start of September 2024.

Retirement: Investors are making changes to increase flexibility on their sites and reduce annual costs to share risk with tenants. Operators envision new schemes featuring a mix of private sale and private rental tenures, indicating a substantial shift that is expected to nearly double the number of senior private rental units within the next five years.

Get in contact: Anna Ward, senior analyst, residential development research 

Global office markets – occupancy levels continue to rise

The Q4 edition of the Knight Frank Cresa Global Corporate Real Estate Sentiment Index provides a clear indication of the tone and short-term trajectory of global office markets.

Occupiers are nervous and whilst they recognise the need to upgrade or reset their offices for the post-pandemic world of work, their ability to do so over the early months of 2023 would appear constrained.

This will put global office markets back into the staccato rhythm seen over recent years, although the dearth of high-quality supply will continue to fuel transactional activity and rental growth at the top end of the market.

A central conclusion from the latest Sentiment Index is that the negativity shaping the macro-economic outlook at the back end of last year has now started to influence expectations around corporate performance.

Get in contact: Lee Elliott, global head of occupier research 

Global residential property – inflation remains sticky but direction improving

The 2024 landscape presents both challenges and opportunities in the real estate market, closely tied to political and environmental factors. With the era of cheap debt in the rear view mirror, investors and policymakers will need to work harder to ensure sustainable and resilient growth in the real estate sector.

Challenges:

With over half the world’s population going to the polls in 2024, elections can introduce uncertainties in the real estate market as new policies, taxes and regulations will shift based on the priorities of the incoming government

Watch list:

• US
• UK
• India
• EU

Climate change poses a significant risk to real estate, with the potential for increased occurrences of extreme weather events, rising sea levels, and other environmental challenges.

Investors will need to consider the long-term sustainability of their investments.

Watch list:

• Asia
• Caribbean
• Latin America
• Southern Europe

An undersupply of homes will lead to increased competition among buyers in the mainstream market, as well as some prime segments, potentially driving up prices and making it challenging for prospective buyers to find suitable housing

Watch list:

• UK
• Australia
• Europe
• US
• Canada

Opportunities:

Governments relaxing tax and property regulations can stimulate real estate activity by reducing financial burdens on buyers and investors.

Watch list:

• Chinese mainland
• Hong Kong
• New Zealand

Real estate's attractiveness as a means to diversify investment portfolios can attract a wide range of investors looking for stability and long-term returns.

Watch list:

• US
• UK
• Switzerland
• Nordics
• Eurozone

Real estate has historically been viewed as a safe haven for capital during times of economic instability.

Get in contact: Kate Everett-Allen, global head of residential research

Investors may seek refuge in real estate assets to protect their wealth and hedge against the volatility of other financial markets.

Watch list:

• London
• New York
• Singapore

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