Making predictions every year is hard and 2022 is no exception. Concerns around the Ukraine war, spiralling energy costs and inflation loom large, the latter driven by unprecedented growth in the money supply during the Covid pandemic.

In the US, the money supply is up by more than 35% and in the UK by more than 20%. In the UK, the situation has been compounded by Brexit, creating the need for structural changes to the way we trade. The question is whether the UK headwinds will pass, whereas continued population growth, the need to create more environmentally friendly assets and the under-delivery of housing will combine with inflation to give UK real estate another good year.

The £9.5 trillion residential market performed well in 2021 as it was up more than 10%, driven by the demand of investors seeking inflation-linked rental income. With continued demand and no supply solution, 2022 will see prices continue to rise with increasing levels of institutional ownership, especially in the single-family PRS/Build-to-Rent market, where asset liquidity is better and construction risk lower.

After a total return of more than 35% in 2021, the industrial and logistics market may seem overvalued. Yet given that 97% of new space was leased within 12 months in 2021 and a development pipeline today of only 18m square feet, rents will undoubtedly continue to go up. Logistics, alongside residential, will remain popular for inflation-correlated income to investors. The key issue for both will be that levels of suitable assets will be exceeded by demand, never an easy balance to achieve.

It is also fair to say that with the Covid outlook brighter in 2022, the prospects for the office and retail sectors are also better. Hybrid working patterns are here to stay, although companies are struggling to entice employees back into the office in certain situations. Higher-quality modern assets with strong amenities on offer will see stronger occupational demand, as well as avoiding the substantial capital costs to meet tomorrow’s environmental standard. Similarly, retail should see a continued recovery as footfall increases, although this is more likely to be concentrated in more accessible retail parks. These are also favoured by investors, as rents are lower and alternative uses can underpin the value.

Other alternative or operational assets, such as data centres and healthcare centres continue to do well, with investors seeking ways to deliver returns outside of a crowded marketplace for mainstream assets. However, as it stands, there is not enough of these assets and they require a high level of specialist skills. For this reason, they cannot provide a scalable substitute to deliver income to a portfolio. Instead of chasing these alternatives investors seem to favour targeting mainstream sectors whilst undertaking strategies that are more difficult to execute. For example, developers and investors will continue to develop new residential and logistics assets across the UK, achieving a better risk-adjusted return.

2022 and 2023 in the UK look like there will be low growth rates for the wider economy. Long term, structural issues such as inexorable population growth, the need to create more sustainable assets and consistent under-delivery from an inconsistent planning system remain. These are the real issues for investors in UK real estate to consider in 2022, 2023 and beyond.

The UK real estate sector is in a bull market. Typically this lead to new entrants going into the market with little understanding of risks relative to the return. It is that at this point in the market that investors should undertake strategies where they can add value, have little or no leverage to defend against volatility and where they fully understand the asset risks. Those that are doing this can capitalise on what remains a strong UK real estate market.

psd have been involved in real estate recruitment across all part of the sector for over 30 years. psd has had a long track record of resourcing senior management and board level positions for clients across all sub-sectors including Commercial & Mixed-Use Development, Residential Development, PRS, Later Living, Student Accommodation, Affordable Housing, Private Equity, Institutional Fund Management and Real Estate Finance. Contact Peter Hardy, managing Director on 020 7970 9701 or mail to: peter.hardy@psdgroup.com