After what feels like years of stagnation or even decrease, there is good news on the horizon – but not for everyone
Abrdn, the asset management firm based in Edinburgh, reports that the UK is spearheading a worldwide recovery in prime real estate assets, following a period of political stability and market repricing after the availability of cheap mortgages ended.
The asset manager suggests that the UK now stands out as a “bastion of relative calm in a more complex global political environment.” Abrdn forecasts that the total returns from UK property will average 8% annually over the next three years.
Anne Breen, global head of real estate at Abrdn, told City AM: “We believe that the real estate sector has now mostly repriced following readjustments as the era of cheap debt came to an end. As a result, we have now upgraded our house view on real estate to neutral after being underweight for around two years. Essentially, we think it is no longer the time to be underweight to real estate versus other asset classes.”
Breen further explained that this real estate cycle is markedly different from previous ones, as rental income has not faced the same challenges. “That means the recovery for future-fit buildings should be faster – boosted by lack of high-quality supply,” she added.
Abrdn is particularly optimistic about residential, industrial, and certain retail properties, which are expected to outperform the broader property sector. Breen highlighted that residential properties are attractive due to imbalances in supply and demand, while industrial and logistics properties are benefiting from the need for modern warehousing to support global and local distribution. Retail sectors that have adapted to changes in consumer behaviour since the pandemic are also performing well.
The fact that the construction sector is suffering is also good news for home buyers and investors as less inventory is being prepared to dampen market prices. Construction output is forecast to fall by 2.9% this year, worse than the 2.2% contraction that was forecast in the previous quarter. Private housing new build and repair, maintenance and improvement (rm&i) have been the main drivers of the underperformance.
Lenders are already starting to cut rates on mortgages, including buy-to-let. Earlier today, Foundation Home Loans introduced a new limited-edition HMO (House in Multiple Occupation) product and announced rate reductions across its ‘Buy to Let’ and ‘Solutions by Foundation’ ranges. Meanwhile, The Mortgage Lender has also cut rates on its buy-to-let offerings.
Foundation Home Loans’ ‘Buy to Let’ range now includes a new five-year fixed-rate HMO product, offering up to 75% Loan-to-Value (LTV) at an interest rate of 5.74%, with a fee of £4,995. This product requires a minimum loan amount of £200,000.
In addition to this new product, Foundation Home Loans has lowered rates on other specialist property products. The rates for five-year fixed-rate HMO loans have been reduced by 25 basis points (bps), now starting at 6.14% up to 75% LTV. The rates for five-year short-term let fixed products have also been cut by 15 bps, beginning at 6.44% up to 75% LTV.
The ‘Solutions by Foundation’ range has also seen rate reductions. Large HMO and HMO Plus rates, available with a 2% fee, have decreased by 10bps to 6.49% and 6.34%, respectively, up to 75% LTV. Additionally, rates for multi-unit freehold blocks have been reduced by 20 bps, now at 6.24% with a 2% fee, up to 75% LTV.
Moreover, expat products in the ‘Solutions by Foundation’ range have experienced rate cuts of up to 15bps, starting at 6.64% with a 2% fee, up to 75% LTV.
In parallel, The Mortgage Lender has also lowered rates on its buy-to-let products.
However, it’s not all good news. Abrdn remains cautious about the office sector. Breen noted: “We are more cautious than most on offices. In our view, a small proportion of the market (i.e. prime central locations) will do very well, but for a large part they face higher tenant churn and more capital expenditure requirements – with large pools of global capital looking to reduce overall exposure to the sector. We therefore advocate a very cautious and selective approach.”
Retail parks have seen a significant rise in Abrdn’s rankings, moving from 33rd in March 2020 to 3rd out of 34 in terms of expected three-year returns. Standalone retail warehouses have also improved, climbing from 30th to 15th. However, other retail areas, such as high street shops and weaker shopping centres, continue to face challenges in stabilizing net cash flows.
Income remains a critical driver of returns, with Abrdn observing that some real estate yields are reaching decade highs. The average yield on prime property in the UK and Europe has increased to 5.7%, up from 4.2% at the previous peak in June 2022. This offers an appealing cashflow for investors, especially compared to the current interest rates on cash and yields on Eurozone and UK government bonds, which stand at 3.1% and 4.1%, respectively.
The UK appears to be at the forefront of the global real estate recovery among developed countries. According to the latest MSCI data to Q1 2024, rolling annual returns for UK real estate are nearing positive territory, while globally they remain down by 5%.
In contrast, real estate returns in the Asia-Pacific region are lagging, with China still contending with a real estate depression and the Bank of Japan raising interest rates while most other developed markets are beginning to cut rates.
