Global Real Estate Chair, Interlaw, London
Real Estate: What is the outlook for 2023?
At the start of 2022, many well-respected commentators in the commercial real estate sector were predicting a more optimistic year and a return to some relative normality following the huge impact of the COVID-19 pandemic.
However, as 2022 drew on challenges mounted up, with rising energy prices and interest rates, increases in the cost of raw materials – combined with increased inflation, a squeeze on the availability of debt and political uncertainty across many jurisdictions, all creating uncertainty in the market. That said, there have been several investment bright spots which have continued to drive transactions across the world as investors look for relatively stable long-term opportunities.
So, as we look ahead towards 2023, what are the main trends to watch?
1. ESG will continue to be a major priority for real estate investors
Environmental, social and governance (ESG) – particularly the environmental aspect - is now one of the top considerations for investors. The environmental impact of the built environment cannot be ignored. For example, investors that have office buildings in their portfolio which meet the highest sustainability standards will find it easier to let and re-let them. So, where there is a need to adjust occupier requirements as businesses settle into long-term hybrid working routines, or if businesses need to downsize, then investors with those properties will find it easier to refill them.
Similarly, the logistics assets that are commanding the highest values are the ones that are the most environmentally sound, and while we are seeing the expansion of green logistics hubs across the world, there is still more work to be done to reduce the environmental impact of the last few miles of deliveries.
2. Certain sectors and regions will continue to shine
The trends we’ve seen in recent years will continue, with the logistics and prime commercial office sectors continuing to attract investors, particularly - as already discussed - those that are able to demonstrate robust sustainability credentials. In fact, in its latest cross-sector forecast for 2023, Savills highlighted prime and green office development, high street shops in affluent commuter towns and suburbs, and prime mid-box logistics developments as the ‘top commercial investment picks’ for 2023.
Retail is always an interesting sector, due to its sensitivity to economic factors. Dominic Rodbourne, Head of Out of Town Retail at Savills, has commented that during COVID-19, out of town retail parks emerged as a success story for both consumers and occupiers, with many occupiers using their retail park stores to fulfil services such as last mile logistics and click and collect. This strong performance has meant that both traditional out of town retailers, as well as new entrants, continue to acquire space, leading to a sharp fall in vacancy rates, which we predict will fall further to a record low in 2023. As a result, the first half of 2022 in particular saw healthy levels of investment activity as sellers crystallised gains and buyers looked to secure stable long-term income.
The hotels sector is another interesting proposition. Although hugely impacted by COVID-19, some commentators are now suggesting that hotels are a good hedge against inflation as room rates can be adjusted to reflect any increases. However, other costs – particularly energy and labour costs – will continue to impact this sector. With population aging becoming a global demographic trend, life sciences, healthcare and the encouragement of healthy aging will continue to provide opportunities for real estate investors.
When it comes to regional trends, Christopher Pilgrim, Managing Director, Global Capital Markets at Colliers, told us:
“We anticipate Japan will continue its drive to attract cross-border capital into real estate, particularly with established office, logistics and multifamily markets, while Singapore continues to see strong performance in pricing across the office and logistics sectors. After some challenging times in Hong Kong, in 2023 we will see investors looking to take advantage which will start to create a competitive market and put pressure on pricing in the key real estate assets classes once again.
“In North America and Europe, as they continue to deal with the headwinds of an inflationary environment and increasing interest rates, investors will be laser focused on the pricing re-set of these markets. There will continue to be opportunity for best-in-class opportunities in the office, logistics and growing multifamily sectors. Cities which re-price the fastest are likely to be the beneficiaries of cross-border capital, and in this regard London and the wider UK leads the way.”
3. More stringent compliance regulations are not going away
Over the past few years, there has been greater scrutiny on the prevention of money laundering, through an increase in client due diligence. This is particularly the case when it comes to cross-border investment activity by non-regulated investors. The need for careful scrutiny over sources of wealth and sources of funds will only continue as many jurisdictions are now subject to stringent compliance requirements, with significant sanctions for failing to comply.
For example, in the UK, the Economic Crime (Transparency and Enforcement) Act 2022 requires overseas corporate owners of UK properties to register themselves with Companies House. This is then recorded by the Land Registry. The responsibility for registrations falls on the owner – including disclosing details of the ultimate beneficial owner. Failure to register (and to keep the register up to date) carries severe penalties, as well as restricting the owner's ability to sell the property. The increased level of client due diligence can have an impact on transaction speeds, so it’s important to address this early on to avoid delays and, in the worst case, nasty surprises. This is a global consideration so will affect multiple jurisdictions, so an important consideration when representing overseas investors.
2023 – a time for cautious optimism?
The coming year will present risks and challenges, but while the outlook may be uncertain, there are also opportunities, particularly for those businesses with the right investment strategies. As Colliers said in its recent 2023 Global Investor Outlook, “we recommend that investors view recent trends not so much as a downturn but as a return to relative rationality” – a sentiment I agree with.