Investors rotate into UK real estate as market volatility rises

Created: 19 May 2022

Curbed global growth exacerbated by rising interest rate, geopolitical conflicts, as well as supply chain issues, are causing a cascading effect on the UK property market. Increased market volatility in equity, bond, and currency markets is inducing investor rotations into reliable real estate assets to hedge against inflation.

The Bank of England raised interest rates to their highest level since 2009 at 1 per cent, echoing similar monetary tightening measures being made across international central banks to slow down inflation. These capital cost rises are accompanied with enhanced volatility in investment markets with the Cboe Volatility Index (VIX) now above its long run mean indicating dampened confidence in stocks.

Additionally, the sterling has weakened to $1.23, with ING predicting this could decline further to $1.20, whilst the relative value of the dollar has appreciated. This increases US investor buying power in the UK. Softer economic performance is being compounded by supply chain issues arising from the Ukraine crisis as well as Covid-related restrictions being implemented in China eroding investor confidence.

With UK inflation expected to peak at 9 per cent towards the year-end by the Office of Budget Responsibility, investors are seeking out resilient markets underpinned by diversification properties, stable income generation potential, growth prospects as well as inflation hedging qualities.

The UK real estate sector is proving attractive to such investors given an ongoing supply and demand imbalance, robust prices and rental growth, as well as increasingly accommodative structural changes at the institutional and political level.

National residential rents are 9 per cent higher than pre-pandemic level, according to Knight Frank, with a 29.2 per cent annual rise in prime central London rents in April. Hotel, logistics, retail and industrial yields have maintained stability whilst an increase in corporate relocations plus the return to the offices has proven a boon commercial demand. As such, investor rotations into UK real estate assets with solid fundamentals look set to accelerate.

In an environment of volatile equity and other financial markets, the income and relative stability that the right real estate can deliver is expected to continue to act as a draw for investors.

https://www.knightfrank.com/research/article/2021-08-04-the-house-view

References

In an environment of volatile equity and other financial markets, the income and relative stability that the right real estate can deliver is expected to continue to act as a draw for investors.

https://www.knightfrank.com/research/article/2021-08-04-the-house-view

References