The author of this article delves into what wealthy investors around the world are doing in the UK real estate market, and why. 

This news service recently interviewed UK-based Oryx Real Estate Partners about its views on the UK’s property market, following a transaction it carried out – with the backing of a Saudi family office – in the logistics sector. That interview shed light on the thinking of international investors about the UK, and on the valuation considerations that have emerged since the pandemic’s end, and the onset of higher interest rates. 

In this article, Johan Eriksson, managing partner at Oryx, gives some brief comments on the state of the market, the investment considerations that arise, and what the future may hold. 

The editors are pleased to share these views; the usual editorial disclaimers apply. Please email tom.burroughes@wealthbriefing.com if you wish to comment.

A recent UBS report found that 30 per cent of its wealthy clientele intend to increase capital allocation to real estate over the next 12 months. This puts the asset class ahead of bonds, commodities, hedge fund strategies, infrastructure, and emerging markets equities. Just 10 per cent stated plans to decrease real estate exposure, with private equity funds (25 per cent) and cash (20 per cent) leading this list. 

Having deployed nearly £200 million ($252.4 million) of capital, including from family offices, into UK real estate across the risk spectrum, we also expect this investor group to be more acquisitive in 2024 alongside institutions. 

The property investment market is returning to “normal” after more than a decade of returns fuelled by cheap financing and compressing property yields. While 2023 was relatively subdued, due to asset value corrections and higher debt costs, the UK should see a quicker recovery than its European peers due to sharper rate hikes causing prime property prices to adjust and bottom out. 

UK inflation has slowed considerably to 3.9 per cent, edging closer to the Bank of England’s 2 per cent target, raising hopes that rates have peaked. Many market participants are now pricing in cuts as early as in 2024, and five-year rates have stabilised.

The current window, with higher property yields and stabilised debt costs, offers a compelling opportunity to realise historically attractive returns, given UK asset pricing compared with 18 months ago.

This is reinforced by the robust occupier market, especially for high-quality fit-for-purpose and future-proof office assets. Cushman & Wakefield reported that office take-up across the Big Five (Birmingham, Bristol, Edinburgh, Leeds, and Manchester) and Central London markets, totalled 3.4 million sq. ft. in Q3 2023, up 32 per cent quarter-on-quarter. This was underpinned by the growing demand for prime “Grade A” space fit for modern occupier requirements, which accounted for 70 per cent of all space taken, well above the 57 per cent five-year average. 

Similarly, occupier demand in the UK industrial and logistics sector saw third-quarter take-up volumes for 50,000 to 100,000 sq. ft. sized units 25 per cent higher than the five-year pre-pandemic quarterly average. Meanwhile, private capital snapped up £2 billion of warehouse assets in Q3; 21 per cent higher than the previous quarter.

Non-institutional investors also have an edge in the current market, being more nimble and often less reliant on debt to complete transactions. This will translate to opportunistic single asset deals unlocking value from investment-grade properties indiscriminately impacted by wider market sentiment, despite offering exposure to strong real estate fundamentals. With current owners seeking to dispose assets increasingly under pressure to accept the new reality, the buyer/seller price gap is also eroding. In many cases, some lenders are accelerating this, leading to distress, and forced disposals at discounted prices.

According to Knight Frank, investors from the Middle East, who benefit from a currency advantage, have acquired about $1 billion of UK commercial property this year, led by warehouse and multi-family residential assets. This was up 30 per cent on 2022 investment volumes. BNP Paribas also reported that Middle Eastern investment into central London office assets this year is the busiest it has been since before the pandemic. 

The UK has always been a top investment destination amongst Middle East investors, particularly when the market presents a buying opportunity for properties that can deliver outsized returns amidst uncertainty in other global asset classes. 

However, challenges remain, particularly around asset price discovery and the long-term trajectory of investment yields, which reduces predictability for future exits. This is different from the last major correction witnessed during the global financial crisis, since it is arguably unlikely that rates will be reduced as quickly and dramatically. 

Leverage will not be as accretive as it was during the low-interest rate era. This raises expectations for asset-level returns, making it crucial to generate higher income and value from active management. For investors, executing this will require deep local market expertise, which is why many are accessing UK assets through specialist real estate managers with a portfolio track record and the ability to invest alongside investors to ensure alignment. 

The more favourable market outlook will attract more dry powder this coming year. However, the market will continue to evolve, and each asset, with its unique risk profile, will require the necessary due diligence from transparent investment managers and advisors, to maximise return on capital.