Worst is now behind us as inflation continues gradual decline: Jen Siebrits

This, coupled with the collapse of two large US regional banks and an international bank has provided a complex backdrop for the real estate market and has certainly made for an interesting start to the year.

So, what are we anticipating for the second half of 2023?

Looking ahead, higher interest rates, the squeeze on disposable incomes and international headwinds mean we anticipate the UK economy will remain broadly flat in 2023, with the possibility of recession still a threat.

The outlook for 2024 is better, with an improved inflationary environment expected to restore consumer confidence, leading to an uptick in purchasing power and driving the start of a recovery.

Despite this, the lagged effect of interest rate rises will continue to drag on growth, and we are forecasting GDP to grow by a modest 0.9 per cent in 2024 and 2.2 per cent in 2025.

The Bank of England should begin to cut rates as inflation declines and priorities shift to supporting long term growth - we remain optimistic that interest rates will peak at 5.75 per cent in Q4 2023.

The subdued economic forecast means we aren’t expecting any notable recovery in capital values for the remainder of the year and it remains the case that it is income returns not capital growth that is driving commercial real estate returns.

Transactions have fallen significantly, foreign investment activity has been unusually low, with circa 30 per cent of volumes in Q1 2023 attributable to

cross-border purchases and capital raising for new funds has notably slowed.

That being said, we are expecting to see an uptick in transactional activity as we enter the second half of the year and some investors will come under pressure to deploy capital. The rapid re-pricing we have seen in the UK relative to other international markets, should stand us in good stead and make the UK an attractive proposition.

However, any recovery is likely to be uneven with residential, logistics and operational assets well-positioned to fare the best, both in terms of market activity and capital value growth.

High costs of debt have been another challenge hampering market activity. The cost of debt will remain expensive compared with recent years, which will continue to pose issues, especially for those investors needing to refinance.

Despite that, we believe the debt market will remain reasonably active with greatest liquidity available for the residential, logistics and life sciences sectors.

To conclude, we are beginning to see a glimmer of light at the end of the tunnel and as inflation continues its gradual decline, the market will start to gain momentum once again. It will be a number of years before we see investment volumes return to their peak, particularly for certain sectors of the market, and a recovery in pricing is likely to be slow but we are optimistic that the worst is now behind us.

Jen Siebrits is Head of UK Research for CBRE