Click here or press enter for the accessibility optimised version

UK ECONOMIC & REAL ESTATE

BRIEFING
September 2022

Real Estate for a changing world

 The August UK inflation rate was BNP Paribas 2023 UK GDP forecast UK 10-year Gilt yield

9.9% ↔ -0.1% ↘ 3.9% ↗

MSCI UK Total Return (3m to end-August) YTD Central London Office Investment(% y/y)* The UK unemployment rate is

-1.1% ↘ £9.9BN (+6%) 3.6% ↘

UK Pound / US Dollar Exchange Rate YTD UK CRE Investment(% y/y)* UK 5-year Overnight Index Swap

1.12 ↘ £41BN (-9%) 4.7% ↗

All data as at 3rd October 2022. *Provisional and subject to
CHARTBOOK
revision.
Click here or press enter for the accessibility optimised version

UK ECONOMIC & REAL ESTATE

BRIEFING
FULL REPORT
ECONOMY
September's ‘mini-budget’ statement by the
Chancellor saw the announcement of the biggest
series of tax cuts in the UK since the early 1970’s.
The government has since abandoned plans to
abolish the 45% top rate of tax following intense
political pressure and financial market volatility,
but the fiscal statement nevertheless shows the
acknowledgment of the scale of the challenges
facing the UK economy in the years ahead and the
need for policies to boost growth.
This is backed by the release of latest survey data
which points to consumer confidence in the UK
falling to its lowest level in 42 years. A key driver
“While the Bank of England thinks
the UK economy is already in
recession, the fiscal measures
recently announced by the
government will help moderate any
downturn. That said, the
implications for government debt
mean there are significant downsides
in the event of sustained growth
failing to materialise.”
Samuel Duah, Head of Real Estate Economics
Share
Share
on
Share
Twitter
on LinkedIn
on Facebook
falling to its lowest level in 42 years. A key driver
for this is the high level of inflation which has
triggered a cost of living crisis, and the associated
unprecedented increases in the central bank
policy rates. Over the next four quarters, we see
the UK recording negative GDP growth. However,
we think that the government’s policies may go
some way to limit the depth of any recession.
With events moving so quickly any forecast is
subject to revision, but we currently expect GDP
growth to slow to 3.4% this year. For 2023, we
think the economy is likely to shrink by -0.1% with
significant risks to the downside.
ECONOMY
“The new fiscal announcements have
fuelled more bond market volatility, with
investors expecting the Bank of England
to hike rates to 5% next year. While it may
then cut rates to help boost growth, it is
likely to keep rates close to this new level
for the foreseeable future. While overall
debt levels are not a major cause for
concern as in 2007, further adjustments
to asset valuations are inevitable.“
Samuel Duah, Head of Real Estate Economics
Share
Share
on
Share
Twitter
on LinkedIn
on Facebook
This support comes with considerable
implications for government finances, being
entirely financed by borrowing and predicated on
assumed future growth. If this growth does not
materialise, then the UK economy could enter a
period of heightened uncertainty.
The fixed income markets are already pricing into
gilt yields the risk that this policy entails for
inflation, interest rates and the health of the
economy in general. The UK government 10-year
bond yields is now priced at c. 3.9% (3rd October)
representing c. 290bps higher than at the start of
the year. The outlook is for this to continue rising
the year. The outlook is for this to continue rising
on the back of rising policy rates and deteriorating
public finance.
For real estate, such a sharp increase in
benchmark rates and the associate increase in
cost of debts has significant implications for the
pricing of risk and investor returns requirements.
We therefore expect adjustments in real estate
yields in the months ahead.
REAL ESTATE
Financial conditions continue to become
increasingly challenging. Five-year overnight
index swaps have continued to rise. Latest
forecasts suggest the UK bank rate will breach
5.0% next year, and the UK ten-year gilt yield
reached 4.4% last week, a post-GFC high and
above our latest prime London office yields. The
last time the risk-free rate breached UK prime
property yields was the onset of the GFC in late
2007. The significance of this is that defensive-
minded investors seeking income can now choose
from a wider range of options, such as high-
quality corporate credit, UK gilts and US treasury
securities.
“September's interest rate rise,
albeit less aggressive than expected,
highlighted once again that we are in
a new monetary policy era with
considerable implications for the
real estate market outlook. Until
interest rate and inflation peaks and
a new pricing equilibrium is found,
investors will take a more careful
approach to stock selection which
will favour core assets.“
Charlie Tattersall, Associate Director, Capital
Markets Research
securities.
Real estate returns are beginning to adjust to the
new normal, with the latest MSCI UK total returns
data showing a 1.1% decline over the latest three-
month period, driven by -2.2% capital
growth. Unsurprisingly, the unpredictability in
financial markets is making assessing pricing and
managing transactions difficult. Figures at the
time of writing show just £6.6bn of UK investment
volume in Q3 - a c. 50% y/y drop. In the Central
London office market, while c. £2.1bn has changed
hands, this is across only a handful of
transactions, and many of these were
REAL ESTATE
transactions, and many of these were
renegotiated having been under offer for some
time. Moreover, the latest consensus forecasts of
returns from the IPF show a huge variation in
views; while office capital returns projections for
2023 have been heavily downgraded to an
average of -3.0%, forecasts for City office capital
growth next year range from 3.0% to -15.4%.
That said, some recent big-ticket transactions
have reassured the market that liquidity remains
healthy in core markets, particularly from
overseas investors attracted by the resilience of
overseas investors attracted by the resilience of
While the uncertainty is likely to persist into
core leasing markets and depressed Sterling.
next year, what is clear now is that further yield
Investment in UK logistics assets from US buyers
decompression to a new equilibrium is
is still on course to comfortably reach the second-
inevitable in all sectors. Leasing demand
highest annual total on record, and APAC-based
remains robust in core markets – with West End
investors remain focused on Central London
office rental growth likely to outperform the
offices having invested almost £4bn this year to
rest of Europe next year - but this will not be
date - c. 400% up Q1-3 2021. For investors able
enough to offset upward yield shift. Our latest
to accept lower risk-adjusted returns and look
forecast is for prime West End office yields to
beyond near-term challenges, opportunities can
decompress by at least 35bps by end of next
still be found.
year to c. 3.60%, with prime City yields to move
out to 4.25% and beyond.
EXPERT OPINION
“The outlook for the UK economy remains troubling, and investors and
businesses are facing very hard questions. Consumers and businesses may find
comfort in some of the government's latest fiscal announcements, but the
market reaction underlines the broad concern over their sustainability.

“There are of course downside risks, but our house view still forecasts a
shallower and shorter downturn than predicted by the Bank of England, and
for less aggressive rate hikes than markets current expect. Moreover, the jobs
market will continue to act as an important pillar for the economy. The
rapidly changing financial context means pricing is moving out and returns
expectations will have to adjust, but it is hugely reassuring to see that London
remains an attractive destination for global capital. This has been most
recently highlighted by Lendlease's £809m acquisition of Landsec's 21
Moorfields, GPE's sale of 50 Finsbury Square for £190m and Helical's £159m
disposal of the Kaleidoscope Building to Chinachem.

“There is so much happening so quickly, from tax and regulatory change, to

planning reform and infrastructure delivery, but we remain on hand to help
guide our clients through a rapidly changing world.“
Etienne Prongué, CEO UK

Share
Share
on
Share
Twitter
on LinkedIn
on Facebook
Click here or press enter for the accessibility optimised version

CHARTBOOK
Click here or press enter for the accessibility optimised version

CONTACT US
 Etienne Prongué Samuel Duah Charlie Tattersall
Chief Executive Officer UK Head of Real Estate Associate Director, Capital
+44 (0)20 7338 4319 Economics Markets Research
+44 (0)20 7338 4207 +44 (0)20 7338 4064
Click here or press enter for the accessibility optimised version

Thank you for reading

UK ECONOMIC & REAL

ESTATE BRIEFING

© BNP PARIBAS REAL ESTATE ADVISORY & PROPERTY MANAGEMENT UK LIMITED. ALL
RIGHTS RESERVED. No part of this publication may be reproduced or transmitted in any form without
prior written consent by BNP Paribas Real Estate UK. The information contained herein is general in
nature and is not intended, and should not be construed, as professional advice or opinion provided to
the user, nor as a recommendation of any particular approach. It is based on material that we believe to
be reliable. While every effort has been made to ensure its accuracy, we cannot offer any warranty that it
contains no factual errors. The information contained herein should therefore not be relied upon for any
purpose unless otherwise agreed with BNP Paribas Real Estate UK and BNP Paribas Real Estate UK
shall have no liability in respect of the same.

Cookies [ 1 ] [ 2 ] Terms Privacy [ 1 ] [ 2 ] POWERED BY