Why invest in the UK?
Don't stop thinking about tomorrow: Charting a course for the UK's recovery
- The UK is currently experiencing a significant economic revival, with both recent and future growth projections being upgraded.
- The UK’s position relative to other countries has improved: growth upgrades come at a time when other major economies are faltering, while the stable political transition contrasts with ongoing uncertainty and flux in large democracies around the world.
- In common with other developed economies, the UK faces several significant structural and social challenges.
- Far from being a separate consideration, real estate is at the heart of the solutions to many of the UK’s current challenges, creating a generational opportunity for the sector.
The new case for UK Commercial Real Estate
- The UK consistently ranks first or second as a destination for cross-border real estate investment across key sectors over the year to date.
- The UK’s ongoing relative liquidity is being driven as much through new and emerging factors as it is traditional strengths and selling points.
- New factors include exposure and commitment to growth sectors (e.g. technology, life sciences and green energy) and a pipeline of structural reform, infrastructure development and productivity improvement…
- …underscored by more established fundamentals, such as a solid legal framework, the English language, a beneficial time zone, favourable lease structures and a competitive tax regime.
Don't stop thinking about tomorrow: Charting a course for the UK's recovery
- The UK is currently experiencing a significant economic revival, with both recent and future growth projections being upgraded.
- The UK’s position relative to other countries has improved: growth upgrades come at a time when other major economies are faltering, while the stable political transition contrasts with ongoing uncertainty and flux in large democracies around the world.
- In common with other developed economies, the UK faces several significant structural and social challenges.
- Far from being a separate consideration, real estate is at the heart of the solutions to many of the UK’s current challenges, creating a generational opportunity for the sector.
The new case for UK Commercial Real Estate
- The UK consistently ranks first or second as a destination for cross-border real estate investment across key sectors over the year to date.
- The UK’s ongoing relative liquidity is being driven as much through new and emerging factors as it is traditional strengths and selling points.
- New factors include exposure and commitment to growth sectors (e.g. technology, life sciences and green energy) and a pipeline of structural reform, infrastructure development and productivity improvement…
- …underscored by more established fundamentals, such as a solid legal framework, the English language, a beneficial time zone, favourable lease structures and a competitive tax regime.
Don't stop thinking about tomorrow: Charting a course for the UK's recovery
Authors: William Matthews & Khadija Hussain
Don't stop thinking about tomorrow: Charting a course for the UK's recovery
Authors: William Matthews & Khadija Hussain
A new dawn?
If one takes the global financial crisis as a logical turning point, the UK is approaching almost two decades of major structural change. The size, composition, society, politics, and global positioning of the UK has evolved dramatically during this time, and yet there is nothing to suggest that the next 20 years will be any less transformational. While some change will be instigated at home, and unique to the UK, many of the triggers will be global in scale – from geopolitics to technology, from demographics to climate change.
Despite these challenges, the UK’s position remains strong. It is a leading global economy, driven by deep financial markets, a top-tier education system, and a reputation for innovation and talent attraction. Additionally, the UK's influence extends through its cultural and diplomatic reach, maintaining strong international relevance. However, the UK faces familiar issues: housing shortages, economic imbalances, and dependency on services. As economic growth moderates, central banks remain cautious about lowering interest rates, and governments have limited fiscal space after pandemic-era spending. Regional disparities and low productivity growth also pose specific challenges for the UK's future.
Real estate’s critical role in the revival
Real estate will play a pivotal role in addressing the UK’s economic challenges, driving growth, and supporting the country’s recovery. There are at least five important elements that make up this case.
- A little bit of luck UK economic growth has outperformed expectations, with its H1 24 performance the strongest in the G7, driven by strong population growth and a recovery in consumer sentiment. 2023 ONS figures show population growth in England and Wales at its highest level for 75 years. As the UK continues to grow, the need for housing, healthcare, and infrastructure intensifies, presenting an opportunity for investment in real estate and sustainable infrastructure to support this expanding population.
- Ideas: the consolation of stagnation? One part of the economy that has remained in robust shape is that of idea generation. Only the US, China and India have more think tanks than the UK, and along with industry bodies, universities, regulators and government departments, these organisations have turned their attention to a vast array of policy challenges. Real estate can benefit from the innovative policy solutions these institutions develop, ensuring the sector remains responsive to evolving regulatory, economic, and societal needs, while enhancing the UK's global standing.
- Investment nationalism: co-opting the private sector With limited public funds, the UK is turning to the private sector to drive infrastructure growth. Aligning public and private interests can unlock significant investment in real estate, while initiatives to attract domestic capital back into the UK offer new opportunities for long-term growth in housing, commercial property, and infrastructure projects.
- Picking winners The government’s industrial strategy, though modest, highlights sectors where the UK excels, including technology, finance, and life sciences. These sectors create demand for modern, flexible office spaces and innovation hubs, presenting a clear role for real estate in supporting growth and ensuring the UK remains competitive in these critical industries.
- Why the UK? The UK remains an attractive destination for investors, businesses, and talent due to its stability and improving economic outlook. As uncertainty rises in other major economies, notably the spread between French and German 10 year bond yield grew by 30bps at the point of peak French election fever, the UK’s political and economic environment offers a safe haven, reinforcing demand for real estate across commercial, residential, and infrastructure sectors.
A new dawn?
If one takes the global financial crisis as a logical turning point, the UK is approaching almost two decades of major structural change. The size, composition, society, politics, and global positioning of the UK has evolved dramatically during this time, and yet there is nothing to suggest that the next 20 years will be any less transformational. While some change will be instigated at home, and unique to the UK, many of the triggers will be global in scale – from geopolitics to technology, from demographics to climate change.
Despite these challenges, the UK’s position remains strong. It is a leading global economy, driven by deep financial markets, a top-tier education system, and a reputation for innovation and talent attraction. Additionally, the UK's influence extends through its cultural and diplomatic reach, maintaining strong international relevance. However, the UK faces familiar issues: housing shortages, economic imbalances, and dependency on services. As economic growth moderates, central banks remain cautious about lowering interest rates, and governments have limited fiscal space after pandemic-era spending. Regional disparities and low productivity growth also pose specific challenges for the UK's future.
Real estate’s critical role in the revival
Real estate will play a pivotal role in addressing the UK’s economic challenges, driving growth, and supporting the country’s recovery. There are at least five important elements that make up this case.
- A little bit of luck UK economic growth has outperformed expectations, with its H1 24 performance the strongest in the G7, driven by strong population growth and a recovery in consumer sentiment. 2023 ONS figures show population growth in England and Wales at its highest level for 75 years. As the UK continues to grow, the need for housing, healthcare, and infrastructure intensifies, presenting an opportunity for investment in real estate and sustainable infrastructure to support this expanding population.
- Ideas: the consolation of stagnation? One part of the economy that has remained in robust shape is that of idea generation. Only the US, China and India have more think tanks than the UK, and along with industry bodies, universities, regulators and government departments, these organisations have turned their attention to a vast array of policy challenges. Real estate can benefit from the innovative policy solutions these institutions develop, ensuring the sector remains responsive to evolving regulatory, economic, and societal needs, while enhancing the UK's global standing.
- Investment nationalism: co-opting the private sector With limited public funds, the UK is turning to the private sector to drive infrastructure growth. Aligning public and private interests can unlock significant investment in real estate, while initiatives to attract domestic capital back into the UK offer new opportunities for long-term growth in housing, commercial property, and infrastructure projects.
- Picking winners The government’s industrial strategy, though modest, highlights sectors where the UK excels, including technology, finance, and life sciences. These sectors create demand for modern, flexible office spaces and innovation hubs, presenting a clear role for real estate in supporting growth and ensuring the UK remains competitive in these critical industries.
- Why the UK? The UK remains an attractive destination for investors, businesses, and talent due to its stability and improving economic outlook. As uncertainty rises in other major economies, notably the spread between French and German 10 year bond yield grew by 30bps at the point of peak French election fever, the UK’s political and economic environment offers a safe haven, reinforcing demand for real estate across commercial, residential, and infrastructure sectors.
The New Case for UK Commercial Real Estate
Authors: Victoria Ormond & Khadija Hussain
The New Case for UK Commercial Real Estate
Authors: Victoria Ormond & Khadija Hussain
A Relatively Resilient Market Amid Global Uncertainty
As global economic, financial and real estate landscapes continue to strive to break free from the shackles of a pandemic, elevated inflation, interest rates at a level unseen by a whole generation of decision-makers, and a slew of other structural shifts, investors are increasingly refocusing their attention on global real estate gateways, with the UK emerging as a prime destination.
The UK is continuing to attract the capital that is out there, catering to a range of objectives, from global diversification or wealth preservation, to exploiting cyclical opportunities.
At the time of writing, the UK stands as the number one global destination for inbound capital. Except for a brief third place in 2018/2019, the UK has consistently ranked first or second as a destination for cross-border real estate investment. Additionally, over recent years an average of 55% of inbound capital has flowed to the regions, so it is not just London benefitting from this.
A Relatively Resilient Market Amid Global Uncertainty
As global economic, financial and real estate landscapes continue to strive to break free from the shackles of a pandemic, elevated inflation, interest rates at a level unseen by a whole generation of decision-makers, and a slew of other structural shifts, investors are increasingly refocusing their attention on global real estate gateways, with the UK emerging as a prime destination.
The UK is continuing to attract the capital that is out there, catering to a range of objectives, from global diversification or wealth preservation, to exploiting cyclical opportunities.
At the time of writing, the UK stands as the number one global destination for inbound capital. Except for a brief third place in 2018/2019, the UK has consistently ranked first or second as a destination for cross-border real estate investment. Additionally, over recent years an average of 55% of inbound capital has flowed to the regions, so it is not just London benefitting from this.
Business as usual?
This drop off in investment by the US, the largest global contributor to global real estate activity, has meant that inbound UK real estate investment activity is largely on par with last year’s over the year to date 2024. Nonetheless, in a year where global volumes are at record lows, the UK is capturing a notable share of the activity that does occur, illustrating its relative resilience.
Business as usual?
This drop off in investment by the US, the largest global contributor to global real estate activity, has meant that inbound UK real estate investment activity is largely on par with last year’s over the year to date 2024. Nonetheless, in a year where global volumes are at record lows, the UK is capturing a notable share of the activity that does occur, illustrating its relative resilience.
Fig 1: Inbound UK volumes are showing relative resilience UK cumulative cross-border real estate investment volumes (£bn)
Fig 2: YTD global cross-border real estate Investment activity remains below recent years Cumulative cross-border real estate investment volumes (£bn)
Fig 1: Inbound UK volumes are showing relative resilience UK cumulative cross-border real estate investment volumes (£bn)
Fig 2: YTD global cross-border real estate Investment activity remains below recent years Cumulative cross-border real estate investment volumes (£bn)
The UK’s “selling points”
The UK’s legal frameworks, language and time zone, bridging the Americas and Asia, along with favourable lease structures all contribute to the UK’s draw, while the recent election was followed by a relative stability dividend in the financial markets. Combined with the Bank of England having implemented its rate cutting, we have additional tailwinds which are set to support UK commercial real estate.
For example, rate cuts in other markets are correlated with increased deal activity.
The UK’s “selling points”
The UK’s legal frameworks, language and time zone, bridging the Americas and Asia, along with favourable lease structures all contribute to the UK’s draw, while the recent election was followed by a relative stability dividend in the financial markets. Combined with the Bank of England having implemented its rate cutting, we have additional tailwinds which are set to support UK commercial real estate.
For example, rate cuts in other markets are correlated with increased deal activity.
Fig 3: There are signs of increasing transaction activity in markets with rate cuts Quarterly all property investment volumes, including quarter 3 to date contracted and pending deals (bn)
Fig 3: There are signs of increasing transaction activity in markets with rate cuts Quarterly all property investment volumes, including quarter 3 to date contracted and pending deals (bn)
The need for a more detailed narrative
In order to find comfort in this recovery and assess the continued resilience of UK real estate, it is important to also assess what else might be underpinning future success particularly as new sectors, from data centres to the residential sectors and beyond develop and traditional sectors evolve.
The UK is well positioned to benefit from technology, life sciences and green energy, which are expanding sectors and bring with them a need for specialised real estate, from office spaces tailored for tech companies, to laboratories and manufacturing facilities for life sciences. This is supported by, for example, the new government's recognition of the importance of data centres and plans to ease planning to develop these.
The UK is the second-largest cross-border market globally for the residential investment and therefore positioned well amid the significant proportion of investors wishing to access this sector.
Fig 4: Living sectors a key target for Investors Active Capital live webinar poll results: which top 3 global sectors are you targeting over the next 18 months
Living sectors
Logistics
PNSA
Data centres
Office
Life Sciences
Retail
Hotels
Not planning to buy
Others
% shows the proportion of respondents that are targeting the given sector Source: Knight Frank Research
The need for a more detailed narrative
In order to find comfort in this recovery and assess the continued resilience of UK real estate, it is important to also assess what else might be underpinning future success particularly as new sectors, from data centres to the residential sectors and beyond develop and traditional sectors evolve.
The UK is well positioned to benefit from technology, life sciences and green energy, which are expanding sectors and bring with them a need for specialised real estate, from office spaces tailored for tech companies, to laboratories and manufacturing facilities for life sciences. This is supported by, for example, the new government's recognition of the importance of data centres and plans to ease planning to develop these.
The UK is the second-largest cross-border market globally for the residential investment and therefore positioned well amid the significant proportion of investors wishing to access this sector.
Fig 4: Living sectors a key target for Investors Active Capital live webinar poll results: which top 3 global sectors are you targeting over the next 18 months
Living sectors
Logistics
PNSA
Data centres
Office
Life Sciences
Retail
Hotels
Not planning to buy
Others
% shows the proportion of respondents that are targeting the given sector Source: Knight Frank Research
The UK financing arena: a diversified landscape
The UK’s financing landscape is one of the most diversified in the world, with a strong presence of both bank and non-bank lenders, the latter emerging following the Global Financial Crisis. This diversity provides at least in part a solution to the debt funding gap in a way that isn’t present in other countries with bank-led real estate lending.
Moreover, we are also starting to see swap rates moderate, even if they remain higher than they were in 2019 / 2020 (assuming a typical 5-year loan term) – ie this gap is starting to wash through, becoming relatively more accretive.
UK commercial real estate as an opportunity for sustainability goals
The UK has more than 15,000 BREEAM New Construction certified projects, over 70% of which are out of London, providing opportunities for investors looking to ‘green’ their portfolios.
Fig 5: Policy divergence reflected in swap rates 5-year swap rates (%)
The UK financing arena: a diversified landscape
The UK’s financing landscape is one of the most diversified in the world, with a strong presence of both bank and non-bank lenders, the latter emerging following the Global Financial Crisis. This diversity provides at least in part a solution to the debt funding gap in a way that isn’t present in other countries with bank-led real estate lending.
Moreover, we are also starting to see swap rates moderate, even if they remain higher than they were in 2019 / 2020 (assuming a typical 5-year loan term) – ie this gap is starting to wash through, becoming relatively more accretive.
UK commercial real estate as an opportunity for sustainability goals
The UK has more than 15,000 BREEAM New Construction certified projects, over 70% of which are out of London, providing opportunities for investors looking to ‘green’ their portfolios.
Fig 5: Policy divergence reflected in swap rates 5-year swap rates (%)
Table 1: 5-year Sonia swap rates have moderated by ~100bps YoY in the UK 5-year swap rates (%)
*Extracted 15/09/2024 Source: Knight Frank Research
Table 1: 5-year Sonia swap rates have moderated by ~100bps YoY in the UK 5-year swap rates (%)
Slide from left to right to view the full table.
*Extracted 15/09/2024 Source: Knight Frank Research
Cyclical indicators
The UK is, by some margin, the largest recipient of cross-border Private Equity investment over the year to date ($5.3bn into the UK vs $1.5bn into Japan the next largest recipient) and more than half of this has been into the regions outside London, across predominantly the hotels and residential sectors, followed by offices, logistics and retail. PE is a leading indicator of cyclical recovery, a positive sign for the UK.
Indeed, indications are that the UK commercial real estate sector, with its economic and financial tailwinds, amid thinner competition and signs of recovery, offers a window of opportunity for investors.
Cyclical indicators
The UK is, by some margin, the largest recipient of cross-border Private Equity investment over the year to date ($5.3bn into the UK vs $1.5bn into Japan the next largest recipient) and more than half of this has been into the regions outside London, across predominantly the hotels and residential sectors, followed by offices, logistics and retail. PE is a leading indicator of cyclical recovery, a positive sign for the UK.
Indeed, indications are that the UK commercial real estate sector, with its economic and financial tailwinds, amid thinner competition and signs of recovery, offers a window of opportunity for investors.