Market Insight

Turbulent times lie ahead, but opportunity will still abound

October 3, 2022
As we head towards the end of 2022, what started off as a year of potential opportunity as we emerged from the pandemic, is starting to look somewhat turbulent – both in property investment and wider economic terms.

At the start of the year, industrial property was king, representing over a quarter (26%) of deals in 2022, and there was no immediate prospect of that changing thanks to the pandemic boom.

The market remained strong throughout the first half of 2022, then things started to change.

It began with the slowdown in the industrial sector as the heat started to come out of the very top of the market, and yields began to move out as expectations around rental growth began to look less convincing. Themes such as rising business rates ahead of Revaluation 2023, rising energy costs and interest rates began to impact deal activity.

This was swiftly followed by the unfortunate events in Ukraine – the impact of which we are now starting to see on the cost of living and rising energy prices.

As we went into summer, the general economy and rising interest rates also started to affect the larger property investors in the market, as institutions were impacted by adverse pressure in the economy and stock market volatility.

Together, this has had a significant influence on the appetite for investment, with the number of transactions going into Q3 2022 over 50% down on the previous year.

Despite this, there was still money in the market, particularly from private investors. Following the Government’s not-so-Mini-Budget, however, we’ve seen further dramatic changes.

Investment risk is undoubtedly rising, and this is making some investors think twice about where best to invest their money, particularly when they can get a safe return from Government GILTs.

This is delivering an even bigger market adjustment as we head towards the end of 2022, as investors look over the horizon to see what happens next.

It is safe to say that the industrial market has peaked, and all indicators are that yields have moved out in Q3, and asset prices have subsequently fallen. But that doesn’t mean that there won’t be opportunities in the market for the astute investor.

Russell Miller, Regional Managing Partner, South Coast.

Whilst some funds are starting to slow activity, property companies that tend to buy counter-cyclically are now buying, alongside private investors who remain in the market.

In the office market, not much has changed as 2022 has progressed – whilst there have been some transactions, this market has remained slow moving, and yields have continued to move out.

The cost of owning, refurbishing and running office buildings is increasing, and growth in rents simply is not there. As a result, investors remain nervous about the costs of owning office assets, as companies focus on quality and Environmental, Social and Governance (ESG) issues.

Whilst companies recognise the need to return to the office, to one extent or another, tenants are going to find it increasingly difficult to afford the luxury of an office at a time of recession, and this may affect letting activity into Q1 2023.

Finally, the polarisation of the retail market has continued between high street retail and the convenience and foodstore markets.

The high street continues to struggle, despite some signs of recovery in 2021 when rents were rebased. Meanwhile, long-let retail investments remain sought-after, offering the security of tenants in the FMCG sectors, albeit at a lower yield.

Key to the success of a retail investment will be its location, with Cathedral cities traditionally doing well, alongside retail parks across the South Coast which have also fared better.

The question in retail as we look ahead to 2023, will be how well underlying retailers get on in a rapidly changing environment, and how investors respond.

Don’t panic

You could be forgiven for thinking that things in the investment market look bleak. Yes, costs are going up – business rates, interest rates, the cost of living, energy prices – and yields are going down.

Yet despite this, there will remain opportunities in the market for the astute investor. There will always be buyers and sellers – people with different risk appetites and opinions on when a market has peaked.

There will be turbulent times ahead, but don’t panic, this could reveal opportunities too. This may be the case for those investors who couldn’t compete in the market before, who might return if prices start to come down – that is, unless they haven’t been tempted by the Government GILT.