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Lack of appreciation of the social utility of UK real estate projects by the communities they were built for has left the sector vulnerable to economic shocks, but greater resilience is an achievable goal.
The UK real estate industry needs to get better at communicating the social value of the built environment to help it weather macroeconomic storms, property sector representatives heard at an industry event in London last week.
Speaking at a breakfast briefing at the London headquarters of European law firm Fieldfisher, chaired by Construction and Projects Partner Cecily Davis, Richard Rees, Managing Director at Savills UK, said high interest rates, gloomy economic forecasts and political uncertainty are putting "huge pressure" on property transactions.
According to Savills' analysis, the volume of UK real estate transactions almost halved in the last year, falling by around 46% since the then Prime Minister Liz Truss' September 2022 'mini-budget' plunged financial markets into turmoil.
Rees said that while interest rate volatility and stubbornly high inflation had slowed the pace of transactional and construction activity in the UK property sector, there are indications that these economic challenges may have "peaked" and there were reasons to be optimistic about recovery.
He identified logistics, life sciences and high volume residential – such as purpose built student accommodation (PBSA) and build-to-rent (BTR) – as potential bright spots, along with high-quality, energy efficient office space.
Oliver Shah, Associate Editor of the Sunday Times, who was also on the panel, said that there has been a much greater focus on governance, the environment and diversity in the real estate industry in the past decade – helping set the sector up for a more sustainable future.
Shah noted that the retreat of real estate investment trusts (REITs) in the face of the growing influence of private equity funds has shifted the sector to more short-term, reactive thinking.
Commenting on the state of the UK property sector, Rees said:
"The UK property industry is particularly susceptible to economic shocks. However, by deepening its roots in communities, the sector can become more resilient to sudden market jolts.
"At the moment, our industry tends to move from project to project, and does not spend enough time explaining to and persuading the users of that real estate how it exists or why it exists.
"The industry really needs to think about its legacy. Part of vulnerability for real estate industry is the vulnerability of not being able to prove its benefit to communities. This needs to change, so that property value is tied to utility rather than the economy".
Cecily Davis, Construction and Projects Partner at Fieldfisher added:
"There is undoubtedly a need for unequivocal policy support for real estate and infrastructure.
"Our clients are telling us they need clear direction on issues such as business rates, the National Planning Framework, housebuilding targets, major infrastructure projects and the Levelling Up Bill. They are calling for clarity and less ad hoc intervention on certain schemes.
"Recently proposed measures such as repurposing struggling high streets to diversify their reliance on retail and better transport connections for communities outside the South East have real promise to deliver change."
Rhodri Pazzi-Axworthy, Real Estate Partner at Fieldfisher, said:
"One of the biggest challenges for our industry is meeting the environmental requirements needed to help the real estate sector contribute to meeting the UK's net zero goals by 2050. Clarity on Energy Performance Certificate (EPC) standards is essential to ensure landlords don't run out of time to upgrade buildings.
"In the commercial real estate sector, we are seeing a real divide between the fortunes of prime and secondary accommodation in terms of their attractiveness to occupiers – the secondary market requires more investment to be lettable and will always suffer more in tough times.
"On the positive side, there are bright spots in the PBSA market and BTR in particular. While each is grappling with higher construction costs, labour shortages and lack of land availability, all have solid fundamentals and look likely to outperform the wider market."