In 2023, the UK residential real estate market is poised to witness positive developments, driven by politics, partnerships, and place-making. Despite facing economic challenges, the industry is adapting and finding reasons for optimism.
The market has been affected by the repercussions of Kwasi Kwarteng’s growth plan announcement last autumn, which lacked cost estimates. While the number of mortgage products available to buyers has rebounded, and interest rates are gradually returning to normal ranges, there will likely be a period of slowed house price growth in the mainstream residential market. This will inevitably impact the activities of volume housebuilders this year.
However, leading experts and commentators foresee a brighter medium-term outlook. Savills, for instance, predicts an average 10% decline in house prices across the UK in 2023, but they expect the situation to stabilize by mid-2024 and for the losses to be recovered by 2026. Given the strong demand for new housing, they believe there will be ample room for investment and innovation in the housing sector over the next five years.
This positive outlook is supported by the ongoing market activity, where housebuilders are actively seeking development opportunities in sites going through the planning process. These sites allow for market recovery during the interim period before the development and sales process begins.
In 2023, we anticipate witnessing more innovative joint ventures between housebuilders, residential developers, institutional investors, local authorities, major registered housing providers, and public funding bodies. Large strategic development sites are emerging around major cities like London’s historic docklands and Birmingham’s Smithfield area. These residential-led mixed-use projects are part of broader urban regeneration initiatives and are expected to significantly transform the urban landscape.
A growing trend in city centers is the densification of housing, particularly in taller buildings situated around transportation hubs and satellite towns. Central government and local authorities are exploring the repurposing of town centers and high street units, which has been accelerated by the pandemic and changes in commuter and working patterns. This presents opportunities for residential developers to acquire sites and deliver new homes as part of these urban mixed-use projects.
Place-making is a central concept in many regeneration projects. It envisions the creation and operation of thriving new communities through collaboration between the public and private sectors. In 2023, we anticipate seeing more innovative joint ventures between housebuilders, residential developers, institutional investors, local authorities, major registered housing providers, and public funding bodies.
Joint ventures between the public and private sectors can be mutually beneficial. They provide housebuilders and developers with a more certain pipeline of supply, including the release of public sector land for development. For housing associations, partnering with experienced developers and housebuilders can help them achieve their objectives of delivering affordable homes, which are increasingly essential in scheme masterplans. Investors are also attracted to these ventures, as they offer an appealing alternative to mainstream commercial assets, particularly in the affordable housing sector.
Additionally, joint ventures can leverage infrastructure and affordable housing funding from organizations like Homes England, central government, and combined authorities. The different motivations of stakeholders can align behind a common purpose, creating opportunities for collaboration.
While the volume housebuilding sector may experience reduced activity in 2023, we expect demand to grow in other areas of the residential market:
Build-to-rent (BTR):
The rising cost of living and increased mortgage costs may discourage some potential buyers and drive them towards renting instead. This presents an opportunity for investors in build-to-rent (BTR) properties.
We anticipate the BTR market will continue to thrive, providing stable cash flows. However, BTR providers are not immune to the high cost of materials and other construction expenses affecting the real estate sector as a whole. Land prices also pose a viability concern for new developments.
To address viability concerns, BTR providers may need to increase rent levels, but they must strike a balance that reflects increased costs while keeping rents affordable for those facing higher living expenses. There is growing political pressure in this area, with Scotland, for example, maintaining a rent cap.
Nevertheless, we remain optimistic about the BTR market’s continued strength and its ability to generate stable cash flows. We also anticipate increased involvement of housebuilders in the BTR market, as well as a focus on single-family housing to meet suppressed demand for new homes.
Later living:
The BTR market also presents opportunities for investment in “later living” accommodations. Institutional funds and private equity firms see potential in build-to-rent-for-retirement (BTRR) assets.
While the BTRR sub-sector is still maturing, there is increasing interest and investment, creating opportunities for businesses interested in operating integrated retirement communities (IRCs). Care home providers and mainstream BTR operators can benefit from this increased investment.
We believe planning law reform is necessary to facilitate the construction of later living schemes. The National Planning Policy Framework (NPPF) could be updated to prioritize retirement housing, housing-with-care, and care homes. Local plans should address the specific needs of IRC development and distinguish them from conventional housing. Additionally, we advocate for including a definition of IRC within the NPPF.
The activities of the housing-with-care government taskforce, aimed at expanding later living opportunities, will be closely watched in 2023. It remains to be seen if there will be a push to encourage people to enter later living schemes as a means of alleviating pressure on the NHS and freeing up housing for families. The sector has long lobbied for stamp duty land tax relief on the sale of family homes.
Despite the need for reform, we expect an acceleration in the construction of new IRCs in 2023. Build costs are stabilizing, and the backlog of schemes delayed during the pandemic is clearing. Investors, operators, and residents are increasingly attracted to “net zero” developments, especially in light of rising energy bills.
Student accommodation:
The student accommodation market is likely to gain the attention of real estate investors as demand in core commercial real estate markets declines. With the right product in the right location, student accommodation offers investors stable cash flows and the ability to adjust rents annually to achieve desired returns.
Student numbers are expected to increase until 2030, resulting in growing demand for basic, affordable student accommodations. Opportunities for returns arise in refurbishing and repositioning “first generation” student accommodation assets through turnaround projects.
There has been a notable shift in sentiment toward traditional student housing, such as houses of multiple occupation (HMOs). Previously viewed as something that purpose-built student accommodation (PBSA) aimed to replace, HMOs are now seen as a complementary offering targeting a different customer base. Institutional investors are seizing the opportunity to assemble portfolios of HMOs, considering adverse tax changes and increased regulation affecting private investors.
Overall trends:
To foster a thriving UK residential real estate market, the government must establish a stable, long-term policy and regulatory framework that encourages investment and facilitates swift development. Housing policy will likely remain a key political agenda item throughout 2023, as the country continues to face a housing shortage ahead of the anticipated general election in autumn 2024. Residential developers will seek assurances from policymakers regarding long-term housing targets, housing supply requirements in local plans, and necessary planning system reforms.
The industry is also expected to continue shifting toward modern methods of construction (MMC) in 2023. Volumetric off-site construction methods hold particular promise in addressing the UK’s housing crisis by reducing delivery costs and promoting efficiency and sustainability. As the drive for decarbonization gains momentum, MMC can also contribute to job creation and help alleviate long
-standing skills shortages within the construction industry.
In conclusion, while the UK residential real estate market may face short-term challenges in 2023, there are reasons for optimism. The market is adapting to changing dynamics, and there are opportunities for investment and innovation in areas such as build-to-rent, later living, and student accommodation. Collaboration between public and private sectors, supported by policy and regulatory reforms, will be crucial in realizing the market’s full potential and addressing the country’s housing needs.
