UK Real Estate Investment Outlook: Poised for recovery, but risks remain
Geopolitical and political uncertainty have brought fresh headwinds, but constrained supply and rebased valuations continue to support the long-term case for UK real estate.
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The UK real estate market continues to offer an attractive deployment opportunity for long-term investors, despite a more uncertain macroeconomic backdrop.
Our latest investment outlook for UK real estate finds that geopolitical tensions in the Middle East and renewed political uncertainty in the UK have weighed on investor sentiment, slowing transaction activity and delaying a broader improvement in pricing.
Nevertheless, we believe the fundamental long-term investment case remains intact.
The significant repricing between mid-2022 and mid-2024 has reset valuations, while constrained new supply continues to support occupier markets across much of the sector and financing markets have eased. As market conditions stabilise, these dynamics should create an increasingly favourable backdrop for investing.
Key takeaways
- Macro uncertainty has delayed, rather than derailed, the investment opportunity. The conflict in the Middle East has pushed energy prices higher, contributing to inflationary pressures and prompting the Bank of England to pause its easing cycle. At the same time, political uncertainty in the UK following the resignation of Sir Kier Starmer as prime minister has encouraged investors to adopt a more cautious stance. While these factors have weighed on market activity in the short term, we believe they do not alter the longer-term investment case for UK real estate.
- Constrained supply continues to support occupier markets. Elevated construction costs, together with tighter development finance conditions, continue to limit the delivery of new space across many sectors. As economic activity strengthens, this imbalance between supply and demand should support rental growth, particularly for well-located, modern assets capable of meeting evolving occupier requirements.
- Needs-based sectors remain best placed to outperform. We continue to favour sectors underpinned by structural demand and opportunities for operational value creation, including industrial and logistics, living, storage, healthcare and selected hospitality assets. Improving pricing and stronger income visibility have also increased the attractiveness of selected retail segments, providing disciplined investors with a broader opportunity set than has been available in recent years.
- Asset selection is becoming increasingly important. Following the broad repricing across UK real estate, future performance is likely to depend less on broad sector movements and increasingly on the quality of individual assets. Location, sustainability credentials and the ability to meet changing occupier expectations are expected to become increasingly important drivers of long-term returns, reinforcing the need for a selective investment approach.
- Recapitalisations and secondaries are creating a growing opportunity set. The current environment is accelerating demand for capital solutions and operational expertise across real estate platforms, companies and other holding structures.
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