Confidence barometer
Compared to the end of 2021, where the outlook for the year ahead was broadly optimistic as Covid-19 restrictions began to relax and economic activity started to rebound, the mood heading in to 2023 is certainly more reserved.
Our respondents reported a general flattening of confidence, at least partly due to the ongoing effects of events in early 2022 which, dampened the enthusiasm that had been dormant during lockdown, waiting to be unleashed. Namely, the war in Ukraine precipitating the huge economic shock of eye-watering energy price increases, alongside broader inflationary pressure.
These challenges remain as we head into Q2 of 2023. The confidence barometer below shows the difference in outlook for the year ahead for 2022 and 2023.
Confidence barometer 2023
Inflation accelerated through 2022, reaching its highest level since the early 90s in October last year (9.6%). 2023 began with a glimmer of hope, though, with inflation flattening slightly in January.
UK inflation (CPIH) - source ONS
This inflationary environment, in combination with rising interest rates, has been described as a ‘wrecking ball’ for residential construction by CIPS, whose Construction Purchasing Managers' Index showed further market contraction in January 2023 and the weakest level of residential construction output in almost three years.
This has been exacerbated further by a challenging mortgage environment for consumers.
In October last year, the average interest rate on five year fixes soared above 6%, while the government’s Help to Buy scheme closed to new applicants the same month.
The cost of finance has impacted the purchasing power of buyers, and while monthly transactions have largely flatlined rather than fallen precipitously the knock-on effects into 2023 will be keenly felt. This may result in a slowdown in transactional activity as house prices reset and housebuilders revise delivery timelines to mitigate declining demand and ability to complete.
Various developers reported falling reservation rates in 2022, and this has spilled over in 2023. The January 2023 RICS UK Residential Survey showed a continued decline in new buyer enquiries marking the ninth successive negative monthly reading for the index.
The commercial market has faced similarly tough conditions.
Following the ‘mini Budget’ in October 2022, Goldman Sachs warned that asset prices could drop by between 15%-20% by 2024.
Mirroring this stark projection, data from CBRE showed a total decrease in capital values in 2022 of 13%, with annual returns of -9.1%. A number of commercial property funds have frozen withdrawals and redemptions as the industry begins to get to grips with the significant adjustment to the financial landscape.
Given the economic shifts we have seen, it was no surprise to see our survey respondents reporting increasing profitability and protecting cash flow as their priorities for the year ahead.
Respondents' business priorities for 2023
At the same time, cost pressures weigh heavy on the minds of industry leaders.
With the Bank of England base rate climbing up from the historic low levels we have seen since 2008-9 and back to, arguably, more normal levels we are now seeing an end to an era of ‘cheap money’.
Our survey respondents acknowledged this, with ‘access to finance’ growing from the issue of least concern last year while interest rates were still low, to the third most concerning issue in 2023.
This year we also specifically included fuel and energy costs, distinct from the general cost of doing business.
Energy prices surged in 2022 as a result of global macro factors not least including Russia’s invasion of Ukraine (gas prices increased almost 130% in the UK in the 12 months to January 2023), but have now showed signs of plateauing.
2023 areas of concern for the real estate industry
This is indicative of wider trends in the market.
The Bank of England base rate is expected to peak in Spring/Summer of 2023 at around 4.25% - 4.5%.
With stability beginning to return, mortgage rates have begun to reverse their upward trend with lenders now increasingly entering into a pricing war to win business from borrowers.
In line with this, while the Construction Purchasing Managers' Index showed a decline in output in January 2023, it also reported rising levels of business confidence – indeed to its highest level in six months – reflecting a perception that the economic outlook is improving.
Research from Colliers suggests that this will see 2023 being a year of two halves. There will be an initial period of readjustment as commercial prices reset, before investment and transaction volumes begin to recover in the latter half of the year. Colliers projects that the MSCI All Property equivalent yield will move from the Q2 2022 record-low of 4.90% to 5.97% by the end of 2023.
The shift in pricing will almost certainly have an impact on the capital raising and structuring strategies deployed in 2023.
Use of capital raising or structuring options in last 12 months
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