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Real Estate Outlook 2023 – Lexology

by Kianna Warburton

The real estate industry has undergone various challenges and successes over the last nine months, and it is important to assess these developments in order to understand their implications for the industry, practice, and clients. At the beginning of 2023, real estate subsector leaders shared their insights on the headwinds and tailwinds they expected for the industry in the coming year. Now, they have taken another look at the industry’s progress and provided their expectations for the rest of the year.

In the Hotels & Hospitality subsector, there have been several headwinds. Interest rates, inflation, and slowed financing have suppressed the US and European markets, causing signs of stress. Additionally, Vietnam and Thailand are facing challenges from oversupply, but this has also presented portfolio investment opportunities. On the other hand, US hotel owners and operators remain optimistic due to the resilient economy and wage growth keeping up with inflation. The UK hotels are performing strongly, with luxury hotels proving to be a successful inflation hedge. France is also performing well, with the Rugby World Cup and Olympics on the horizon.

In the Private Equity subsector, there are challenges as well as opportunities. Higher debt costs and rate unpredictability make it difficult to achieve desired returns. The “flight to quality” has led to intense competition among potential investors and buyers for Class A properties. There is also a mismatch in pricing expectations, with buyers waiting for distress and sellers holding out. However, there are also tailwinds in the form of alternative debt opportunities, a shift towards less traditional asset classes and creative deal structures, and the ability to acquire properties at relatively low prices during a bear market.

The Logistics subsector is also facing headwinds, such as the transition to more environmentally friendly buildings, which can be costly and make existing buildings obsolete. Interest rates and terms continue to impact the availability of finance, and competing sectors may attract a larger percentage of available investment. However, there are tailwinds as well. Supply remains strong, but there is a shortage of high-grade logistics and industrial stock. Vacancy levels are low, and demand is holding up. The trend of nearshoring benefits the sector, as geopolitical uncertainty and supply chain issues drive demand for logistics space. Architects and developers are also finding innovative ways to integrate AI and automation technologies when designing industrial buildings in urban areas.

In the Life Sciences subsector, there are both headwinds and tailwinds. Deal volume has decreased due to a shortage of high-quality sites and a lack of speed and flexibility in the planning process. However, the sector remains strong as an investment destination, with a thriving life sciences economic environment in the UK. The government has launched a £650 million growth package to support this sector, and there is a high demand for occupiers and rents. The development pipeline is healthy, but valuations and returns may start to soften. Debt finance is available, but current interest rates may deter some investors.

In the Healthcare subsector, there are specific tailwinds and headwinds for Retirement Living and Care Homes. In Retirement Living, existing investors are expected to diversify or increase their exposure. Overseas operators and developers are expanding to the UK and seeking long-term funding partners. Additionally, the launch of the Older People’s Task Force and expectations of legislative and regulatory reform are positive developments. However, there are concerns regarding the government’s response to the NPPF Consultation and the complexity of biodiversity net gain requirements for Local Planning Authorities.

For Care Homes, there are opportunities for European consolidation. However, there is a risk of further closures due to mortgage rate increases compounding existing headwinds. The impact of Minimum Energy Efficiency Standards Regulations is also a challenge.

These insights from real estate subsector leaders highlight the various factors influencing the industry in 2023. It is essential for professionals in the industry to stay informed about these trends and developments in order to make informed decisions and provide the best guidance to their clients.

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