Sector trends: students, sheds and science on the march
The overall lack of confidence heading into the new year is cast into sharp relief by survey respondents’ predictions for growth in key sectors and asset classes over the next 12 months.
At the sector specific level, residential remains the highest growth area, with predicted office activity dropping significantly – falling below both retail and food, beverage and hospitality. Whilst this may be surprising given the issues the new build housing market is facing, it is indicative of the continued need for more rental accommodation, both affordable and mid-market. That is borne out by our respondents who see these asset classes as being less affected by the changed financial landscape than for sale housing.
Student housing emerged as the leading alternative asset class in which survey respondents expected to be active in over 2023. Student housing is an attractive investment, due to its high and consistent demand, the stability of rents and yields, and the relative short-term nature of tenancies which helps to reduce risk and maintenance costs.
There are almost 3 million students in the UK according to the HESA, with 2021-22 numbers rising 4% on the previous year. At the same time, supply remains low, including Purpose Built Student Accommodation (PBSA), with only 667 more beds delivered in 2021-22 compared to 2020-21 according to figures from Cushman & Wakefield.
Amid the shortfall in accommodation, many students therefore turn to private landlords. However, large numbers of those planning to offload investment properties, partly as a result of a challenging tax regime, and rent caps in parts of the UK. Around a third of private landlords expect to reduce the number of properties offered for rent in 2023 according to the NRLA.
Predicted growth in core sectors
With these dynamics resulting in real value potential, the student accommodation sector seems poised for continued growth, signalled in 2022 by Greystar’s acquisition of PBSA specialist Student Roost in one of the biggest deals of the year (£3.3 billion), as well as Unite Students being promoted to the FTSE 100 on strong earnings.
However, taken together and across sectors and asset classes, an average of more than a third (34%) of our survey respondents are predicting overall decreases in activity – up from 19% in 2022. Predictions for growth have plummeted from an overall average of 41% in 2022 to just 26% this year.
This mirrors estimates from the Home Builders Federation that new housing completions could slump in the next decade, potentially falling to 111,000 against the government’s target of 300,000 new homes per year. Housebuilders, including Persimmon – whose full year results for 2022 estimated that 2023 would see 8,000 – 9,000 completions, a reduction from around 15,000 the previous year – have sounded a cautious note about the year ahead.
Planning and delivery
A decline in completions will continue to deepen the ongoing housing crisis in the UK, with some analysts suggesting there is already a backlog of more than 4 million homes which have not been built.
Key to this issue remains the planning system, with the HBF (and others) critiquing the government’s approach to planning reform and the Department for Levelling Up, Housing and Communities rowing back from 300,000 new homes per year as a firm target to simply being advisory.
The government is consulting on proposed changes to the National Planning Policy Framework, with a response due in spring 2023, as part of the passage of the Levelling Up and Regeneration Bill.
Planning has also been cited by the commercial sector as a significant impediment to growth, including in the logistics space, with Segro Chief Executive David Sleath calling for modernisation of the system to help developers address a continued lack of supply and high demand.
Sheds at the tipping point?
Industrial was predicted by our survey respondents to see the highest levels of growth of any commercial asset class in 2023, while logistics specifically has remained the ‘alternative’ commercial occupier asset class with the highest growth prospects this year.
Projected activity in alternative sectors in 2023
The government is consulting on proposed changes to the National Planning Policy Framework, with a response due in spring 2023, as part of the passage of the Levelling Up and Regeneration Bill.
However, logistics and warehousing is not without its challenges.
Online retail sales have corrected after reaching unprecedented levels during the pandemic, with further reductions in consumer spending resulting from the cost of living crisis, and this has had knock on effects for ecommerce operators, who account for a significant proportion of logistics real estate activity in the UK. Research from Gerald Eve released in January this year showed that internet retailers accounted for just 12% logistics space take up in 2022, down from a peak of 31% in Q2 2021.
The big names are not immune – with Amazon, for example, confirming plans to close three UK facilities in early 2023 as part of a wider restructuring exercise.
But the fundamentals in the sector continue to make it an attractive investment proposition, even as it recalibrates in line with wider commercial property pricing and yield shifts.
Vacancy rates remain low, averaging around 3.1% and, in some parts of the UK such as Yorkshire, dropping as low as 1.2% according to Colliers.
In a sign of the logistics sector’s continued vitality, despite economic pressures, investors Arrow Capital started 2023 successfully with its first UK disposal, of a £30 million warehouse to Letfield.
2022 even saw the completion of the largest warehouse sale in the UK, with Arrow Capital securing a major 2 million+ sq ft site in Wakefield from Mountpark Logistics for Amazon, for £233 million. The facility is notable for its environmental credentials, targeting a minimum BREEAM rating of ‘Very Good’ and an ‘A’ EPC rating, while roof is covered in power generating solar panels. The fit out the roof supports Amazon’s state-out-the-art robotic technologies, including automated depalletizers.
Along with being a significant statement of intent, this deal and site in particular is a signifier of the continued flight to quality assets – common across the commercial property market – with ESG criteria and technological capabilities factoring high on the demand list for occupiers and investors.
A science superpower
Around 16% of our survey respondents confirmed that they expected to be delivering projects or completing transactions in the life sciences/R&D sector in 2023, the second most cited commercial occupier asset class.
In his Conservative Party leadership campaign in 2022, Rishi Sunak boldly announced his intention to make the UK a science superpower. This vision is supported by the sector’s track record, throughout history and in recent years, not least including the successful roll out of the Oxford Astra-Zeneca Covid-19 vaccine.
There is commensurately huge demand for space, particularly in the Cambridge – Oxford arc and in major research and talent clusters, especially in close proximity to high quality universities, including in London.
In similar fashion to the logistics sector, vacancy rates remain a huge driver of both market pressure and investment potential, with data from Bidwells showing that Cambridge, for example, saw a zero availability rate for lab space in the summer of 2022. Heading into 2023 this has only improved slightly, with less than 10,000 sq ft of space available in the city.
Cushman and Wakefield project that it won’t be until around 2025-26, when the development pipeline will have delivered around 4 million sq ft of space, that a significant proportion of occupier demand for sites in the ‘Golden Triangle’ will be met.
In the meantime, existing landlords are seeking to tap into this demand through both redevelopment and conversion of existing space – especially in London and the Golden Triangle.
This activity has showed no signs of slowing down in 2023, with UBS and Reef Group receiving planning permission for a substantial town centre redevelopment in Stevenage, which will deliver around 450,000 sq ft of lab space across an existing retail site. Landlords British Land have also been undertaking conversions, including turning office spaces in high profile sites like Euston Square into labs.
London, in particular, is seeing a boom in life sciences interest, including in traditional white collar job locations and around major urban transport hubs:
Kings Cross
MSD developing a 25,000 sq m Discovery Centre and UK HQ
Canary Wharf
Joint Venture between Canary Wharf Group and Kadans Science Partner to develop a 23 story ‘vertical campus’, delivering Europe’s largest life sciences building
Paddington
Imperial College Healthcare NHS Trust redeveloping the St Mary’s Hospital site to deliver its ‘Paddington Life Sciences’ vision, including 1.5 million sq ft of commercial and lab space
But threats remain to both the government’s vision for the sector and for investors.
Fundraising in UK biotech fell dramatically in 2022, albeit from a major high point in 2021, with businesses attracting £1.8 billion of investment compared to £4.5 billion the previous year according to the UK BioIndustry Association.
At the same time, major operators have signalled their discontent with the UK’s broader fiscal policy being out of kilter with its life sciences ambition. In February 2023 Astra Zeneca, for example, cited an unfavourable UK tax environment for its decision to invest in a manufacturing facility in Ireland rather than the North West of England.
The corporation tax rate rise to 25% from April 2023, alongside a contraction of the R&D tax credit scheme for SMEs have all been cited as potential roadblocks to continued life sciences growth.
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