Eight real estate asset classes will see returns of more than 8%, predicts the firm’s latest study
Eight real estate asset classes will see annualised returns in excess of 8% this year, according to Savills' 2024 cross-sector UK forecasts, which include its top picks for commercial property. The global adviser says buy-to-let in the North West, London industrial and retail warehouses will all experience annualised investment returns of between 8.5% and 9.2% between 2024 and 28. Its annual cross-sector forecasts suggest a stronger outlook and opportunity for UK property investment in 2024 as interest rates steady. But it says returns will continue to be driven by income potential instead of capital growth.
In commercial property there is an opportunity to buy at the very bottom of the cycle, with retail, industrial and office space looking “comparatively cheap”. Savills says that opportunistic investors will target parts of the retail market because of rebased rents and rates, and higher yields, as well as the “medium-term capital growth upside that could come from change of use”. Occupier demand for prime high-quality and highly rated warehouses, meanwhile, is also set to keep prices rising in 2024, especially in London, it says.
Savills says while last year was “uneven” for the UK office market, cooling inflation, falling borrowing costs, and good rental growth prospects will make some development schemes more viable in 2024. Investors will look to capitalise on the undersupply of prime and green office space. Breaking down forecast trends for commercial, Savills says 2024 will be a year when investors stop making “sector-wide pronouncements and start to focus on the traditional asset-specific basics”.
Undersupply of prime and green office space across the UK’s major markets “remains a fact” it says, and will continue to be a driver of better than average rental growth over the short to medium term. Savills does not expect to see a surge in retail investment volumes in 2024. Nevertheless, some prime yield hardening in some sectors and locations is “baked into its forecasts” for both 2024 and 2025.
Logistics and life-sciences will both be on investors’ shopping lists in 2024 as both sectors offer an “attractive mix of structural change driven demand, restrained supply, and strong rental growth prospects”.
Savills’ top picks are –
Strategic sheds: Well-let logistics projects in good locations where the value over-corrected in 2021-23. Savills says investors will look to buy in 2024 and sell into a hot market in 2026.
Core offices that are priced as value-add: High yields and strong rental growth prospects mean that value-add returns will be briefly achievable on core offices, it advises.
Essential retail: Foodstores and neighbourhood-focused retail look cheap, Savills says, saying population growth, omni-channel retail and constrained stock all support entering these segments now for an income-focused strategy.
In residential, turbulence in the mortgage markets, an uncertain planning environment, increased build cost inflation and regulatory changes in the private rented sector, suppressed transactions and growth in the residential sector in 2023. But Savills says that with inflation heading back towards the Bank of England target of 2% and more stability in the mortgage markets, it expects to see the primary sources of financial disturbance ease back.
Despite tougher conditions for landlords, with Savills forecasting rents to grow by a further 18.1% by 2028 there is still significant opportunity for those less reliant on debt, particularly for those with a portfolio furthest from London, with Savills forecasting 9.2% returns for the North West.
But struggles in the private rented sector are also expected to spur on institutional landlords, and both built to rent and purpose built student accommodation are expected to play an increasingly important role.
Farmland remains a solution to many of the challenges being faced by society, particularly the environmental targets the government has set, Savills says. It continues to provide long-term capital growth, and in 2023, global conflicts reinforced the importance of UK land producing food, fuel and fibre. Prime arable land with the main purpose of food production will continue to be in demand, especially land with access to a resilient water supply. Savills has forecast capital growth of 3% for prime arable land.
While the UK forestry market slowed over 2023 from its peak in 2021, the investment opportunity that land offers as the UK continues to work towards net zero emissions by 2050 (2045 for Scotland) is still significant, the adviser says. Savills forecasts that Grade 3 arable land could provide the “optimum balance of risk due to its flexibility”.
Richard Merryweather, Savills Joint Head of UK Investment, said in a statement: “The UK is one of 40 counties that is expected to have an election in 2024 which often causes investor uncertainty. However, our analysis suggests that although transactional activity is generally lower than normal in the three months prior to the election date, it recovers over the following six months. The rationale for investing in land and property remains good, particularly for investors who are looking for infrastructure-type investments that deliver comparatively predictable income streams over the long term. A rising interest in food security and carbon reduction is likely to boost investor interest in these segments. We are seldom able to see the bottom of any cycle this clearly, but we are confident that 2024 and 2025 will be the years in which normal service will be resumed.”
