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KPMG audit partner James Le Bailly highlights some of the opportunities presented by the ups and downs in the market
AS we move into the second half of 2024, the word of the year – and indeed the decade – continues to be “uncertainty”.
This uncertainty will continue through the rest of the year and into 2025, with several significant economic and political events taking place that will impact the real estate market.
This is not real estate’s first rodeo and the cyclical nature of the market is nothing new. Those who are prepared can take advantage of the opportunities presented by its ups and downs.
London and UK real estate remains an attractive sector for global investors. London is the jewel in the crown, but the rest of the UK is also attractive for various asset classes.
Jersey structures holding beds, sheds and meds
Jersey’s relationship with UK real estate is well established. Investment is made through Jersey-domiciled structures into the London skyline and across the UK. For this relationship to flourish, Jersey needs to ensure it remains an attractive proposition for these structures.
So what real estate asset classes do investors want to invest into? And how can Jersey ensure it remains a jurisdiction of choice?
Prime West End offices (Mayfair and St James’s) continue to command attention and – contrary to the rest of the London office market – demand from occupiers still outweighs supply.
Elsewhere, the phrase “beds and sheds” is now “beds, sheds and meds”. Life sciences (which covers a wide range of medical fields including biotechnology and pharmaceuticals) has joined purpose-built student accommodation (PBSA) and logistics as key asset classes.
PBSA continues to be desirable for several reasons, not least because of the high demand for UK university places and the significant shortfall of beds. The expectation is that this will only widen over the coming years. Onerous planning requirements and the need to modernise existing assets will do nothing to lessen the demand for quality PBSA assets across the UK.
The logistics sector remains attractive for investors. The fall in occupational demand in 2023 was an expected reset following the Covid and post-Covid boom, as opposed to a shift in market appetite for prime logistics assets in the right location. These assets are still hugely desirable owing to the opportunity for secure long-term tenants operating in the distribution supply chain fuelled by online retail.
The life science industry (the “meds”) is growing at an astronomical rate. Investors recognise the huge potential for lab-enabled research and development facilities clustered in educational and innovation hubs.
These support the significant private and public investment into digital health and technological advancements.
We have seen more structures being set up to develop and hold these assets in the golden triangle between Oxford, Cambridge and London. Central London office spaces have also been repurposed to accommodate life science operators and to command the significantly higher rents they offer.
A number of overseas investors are entering into joint ventures with UK developers to align foreign capital and local expertise to deliver new life sciences assets. This trend is expected to continue as confidence returns to the investment market.
A drop in rates and uncertainty
Overseas institutional investors will continue to seek exposure to UK real estate to diversify their investment portfolio with an income-producing tangible asset class. But buying the right asset under the right terms will remain key, and uncertainty impacts that.
The question remains – when will interest rates fall and by how much? We must remember that 0.5% – despite being held at this level for seven years – was never normal. In fact, it was exceptionally abnormal.
June 2024 has seen inflation (CPI) hit the Bank of England’s target for the first time in almost three years. The consensus is that there will be interest rate cuts soon.
The BoE has just held the base rate at 5.25% (June 2024) with the next opportunity for a rate cut in August. While yields are consistently below lending rates, access to the market will be restricted to those with low costs of capital or available cash.
Despite the ongoing uncertainty, investors do not want to miss out on pulling the trigger. Market sentiment has shifted, and cautious steps are being taken.
But a gap remains between buyer and seller expectations. There is a need for more transactions to close the gap.
This is also the year of national elections, with numerous countries heading to the polls. We are seeing some clarity on each party’s policies in the lead up to the UK general election – and ESG policies are holding prominence as a key campaign focus.
This will do nothing to curb demand for sustainable offices, as the supply of prime offices in London simply cannot keep up, especially in the core West End. This gap will further widen based on construction pipeline.
Government spending on research and development – irrespective of who has the keys to Number 10 – will keep breaking the ceiling. This will further fuel the life sciences industry. Meanwhile new government policy in other areas such as tax policy impacting offshore jurisdictions will be of interest to us all.
Jersey playing its part
Jersey remains an attractive domicile for RE structures, although there is continued competition from the UK and other international finance centres such as Luxembourg.
In terms of holding our own, we have seen a continued positive trend, such as from US managers looking to hold European investments or targeting European capital. Jersey’s reputation as a highly regulated top domicile for asset management is acknowledged.
Jersey needs to continue demonstrating that it is a premier centre, with a compelling and flexible regime supported by top-tier administrators, accountants and lawyers with deep industry expertise. We are all accountable for doing our bit.
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The KPMG real estate team is available to assist you and guide you and your clients on all aspects of the industry. Find out more by emailing jlebailly@kpmg.com.
