A flood of capital is coming for portfolios

The UK’s real estate market today is a very different place to where we were just a few short months ago.

Following Liz Truss’ ill-fated mini-Budget, the market paused and the few investors that remained active became much more cautious. Interest rates – already on the rise – were sent higher still, while over the following weeks rates and yields tracked out together. By way of example, pre-Truss, a prime yield on an industrial asset would have been 4-5%. Post-Truss, that would shift 100-150 basis points to 5 or 6.5%.

Fast forward to today, we find investors more optimistic we’ll see off the worst of the economic headwinds. While we may dip into recession, it won’t be nearly as bad as some had thought it would be. Rates seem likely to begin to come down. Meanwhile, the labour market is proving relatively robust.

What this all means is that portfolios will be immensely competitive. Amid a clearer economic picture, and likely tax breaks to come as the Conservatives gear up for an uphill general election battle in 2024, we’ll see just how much pent-up demand there is.

Take a couple of industrial portfolios that Allsop has been marketing as an example. In mid-November, prospective buyers were thin on the ground. However, in the past few weeks, we’ve seen as many as 20 firms return to the market, keen – albeit still cautious – to deploy their capital. The strong fundamentals of the industrial occupational market (with voids nationally at around 3.4%) continue to make it a compelling asset class.

We’re also seeing a resurgence for retail warehousing. While yields tracked out, the long-term average remains attractive and we’re seeing most UK institutions put out requirements for the sector, while U.S. private equity is circling, too. There are depths of interest in the alternatives sector, with long lease assets including GP surgeries, health clubs and better performing hotels all looking like good buys.

While pricing will harden, stabilisation in the economy will see many investors look to deploy their cash as quickly as possible – and portfolios, rather than individual assets, will prove particularly attractive for that reason.

This blog was first published on 21st February by CoStar. You can see the full article here