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Given the changing economic and political landscape, are you looking to change your portfolio balance across the various real estate classes?
The economic and political landscape in the UK is ever-changing and has had an impact on the attitudes of real estate investors. Fast-changing governments, rising inflation, increasing borrowing rates and a cost of living crisis is at the forefront of people’s minds. This is impacting businesses within the real estate industry and their different risk profiles, and whether this will influence changing the makeup of their real estate portfolios. 53% of respondents are not looking to change their portfolio balance across the various real estate classes, while 42% are seeking to either substantially invest in a new sector or change their balance at margins. Due to the nature of the industry, significant time and costs are involved in changing a business’ portfolio therefore it is not surprising that majority of respondents plan to keep their portfolio the same. What is surprising is the high percentage of respondents prepared to explore new areas to invest, whether this is because they have identified additional opportunities in other areas of the market or due to restrictions in their existing sector remains to be seen. It suggests that now more than ever its seen as worthwhile to review and consider changing a business’ portfolio including if it involves venturing into a new sector (per 16% of respondents).
No
53%
26%
Yes, but only at margins
16%
Yes, looking for substantial investment in new sector
5%
Undecided
1
2
3
4
5
In the past 12 months, where has the majority of your financing come from?
Over the past 12 months, 63% of respondents have obtained the majority of their financing from lending banks, with almost half of these reporting that funding has either been harder to access during this period or has been accompanied by increased covenants and restrictions. This is not unexpected given that economic uncertainty coupled with fluctuating interest rates increases the risk of lending from a bank’s perspective. Indeed, the Bank of England’s bank rate has swelled from 0.75% to 4.25% in the 12 months from 31 March 2022.
63%
Lending banks
21%
Personal wealth
11%
Private equity
Shared ownership structures
How has access to funding changed over the past 12 months?
Stayed the same
42%
Harder to obtain
Improved, but typically with more covenants and restrictions
53% of respondents have indicated access to funding has stayed the same which shows that the availability of funding in the past year is similar to what was available in the immediate post pandemic world. Looking at the long-term the real estate industry is a valuable market, even in the face of economic uncertainty and instability across a number of sectors in the UK, this is an industry where banks will remain open to invest in. However, unlike in the pre-pandemic period, there seems to have been less uptake from the alternative lenders such as joint ventures or crowd funding, where the least chosen as a source of funding, if at all. This area of the market seems to have slowed down in recent months.
What are the most significant challenges your business may face in the next 12 months?
There are a number of challenges that real estate businesses are likely to face in the next 12 months, and there appears to be some debate over which will prove to be the most significant. However, a common theme among respondents is that finance and economic conditions will present the greatest obstacles, with the most prominent being the UK economy and consumer confidence, increased finance costs, inflation and increased construction costs. Inflation rates reached a 41-year peak of 11.1% in October 2022 and in February 2023, it was recorded at 10.4%. While the consensus is that hopefully these inflationary rises have reached the peak in the first half of 2023 there is no suggestion that we will be returning to the historic low rates of the previous few years. Dealing with inflationary increases will remain an important component of the management of real estate projects going forward. Consumer confidence in 2023 remained well below zero and still hasn’t reached the pre-pandemic levels. This is in line with the sentiment towards the cost of living crisis. However, it appears to be on the rise, with consumers reporting a higher confidence in their personal finances as well as a growing willingness to make expensive purchases. As such, there is reason for cautious optimism that the economic landscape may not offer as great an obstacle as initially feared by 68% of the survey respondents. 21% of respondents felt there was a distinct lack of availability of property opportunities. This is in line with reports that state we are currently witnessing a ‘seller’s market’, with the average price of properties having risen by 0.8% from January to March 2023. Therefore, it appears there is still an appetite for more real estate investment, and good prospects for reasonable returns but simply not enough property opportunities are available. With the challenges highlighted in the precept of this report, the ones that showed the least concern were those relating to ongoing uncertainty regarding global stability, low energy supply and lack of skilled workers. These appeared as outliers in the survey results. These could be considered as real concerns on their own merit but when compared against actual costs and state of economy they were showing as less of a concern.
68%
UK economy and consumer confidence
Ongoing uncertainty regarding global stability
Increased construction costs
Inflation
32%
Increased finance costs
Lack of skilled workers
Planning regulations
Energy supply
Availability of property opportunities
What policies do you think would be most helpful to boost the property industry?
Our report highlights investors are keen for greater incentives to be introduced to encourage real estate investment, with 53% of respondents indicating a reduction in the level of property specific taxes would boost the property industry, while 63% favoured the easing of planning restrictions and reforming of business rates. The desire to reduce the level of property specific taxes and red-tape is in line with the growing adverse impact of the economic instability being experienced. The presence of high rates of Stamp Duty Land Tax (SDLT) and Residential Property Developer Tax (RPDT) has particularly hit residential development, coupled now with the increase in the overall rate of corporation tax. While the historic nature of business rates calculations has adversely impacted the high street and commercial investors. Over a third of respondents would like to see greater incentives being in place for retrofitting properties to meet ESG targets. The requirement for residential properties to have an EPC rating C by 2025, and the stringent requirements for planning permission to be granted before any changes are made to use of a building hinders companies from making the developments they desire. Respondents have highlighted it is costly to meet their ESG targets and they are not seeing sufficient support from government to offset these additional costs. Investments in skills and training for the sector, further devolution of planning to local areas and greater investment incentives such as freeport and enterprise zones had little consideration from respondents, which is interesting given part of the current government fiscal policy currently is to introduce more enterprise zones.
Easing of planning restrictions
Investment in skills and training for the sector
Reforming of business rates
Reduction in the level of property specific taxes, such as SDLT and residential property developer tax
37%
Greater incentives to retrofit properties to meet ESG targets
Tax relief in the form of 130% first year allowance (FYA), known as super deduction, ends on 31 March 2023. Has this impacted your decision-making on incurring expenditure?
It has had no impact on our timing of capital expenditure
We have considered accelerating or decelerating our current capital expenditure planning
It has had a significant influence on when we incur the expenditure
We are not aware of the existence of super-deduction capital allowances
N/A
The 130% FYA was introduced to encourage firms to invest in productivity enhancing plant and machinery assets which would help the businesses grow. This capital allowance allows for companies to reduce their tax bill by 25p for every £1 invested, counteracting the effect of the proposed corporation tax rate increase from 19% to 25%. However, almost two thirds of respondents reported that the introduction of the super deduction had no impact on the timing of their capital expenditure, thus reflecting a potential overestimation in the forecasted effect. Businesses have carried on making capital investments to suit their needs rather than in time to benefit from the government incentives. Only 11% of respondents confirmed the tax relief has had a significant influence on when they incur the expenditure, 5% of respondents were not aware of the existence of super deduction to start with. There was a growing sense that the government would seek to replace the super deduction with an alternative capital allowance following its expiry, and the Chancellor duly obliged in the Spring Budget, announcing a 100% FYA on qualifying capital expenditure, which provides an equivalent effect when accounting for the increased rate of corporation tax to 25%. Perhaps, the expectation that the super deduction was not technically ending in March 2023 would have reduced the time pressure of making capital investment which was inherent in this allowance. However, we do get a general sense in any case that the perceived benefit of this allowance was not substantial enough to stimulate spending. It may well be that given the longer nature of property developments, the two-year horizon in relation to the super deductions was also too short to have any meaningful impact. Hopefully future budgets will not seek to adjust the recent changes too quickly, if the policy is looking to drive long term capital investment.
