When inflation is rising, investors could view property as a potential means to hedge against it, as long as they identify and select appropriate, defensive stock. The RICS report [UK Economy & Property Market Update May 2022.indd (rics.org)] said sentiment towards property is at its highest since Q1 2017. However, while real estate investment may be an effective tool against inflationary pressures, is it enough to mitigate the effects of a threatened recession in the future?

The Bank of England is already doing what it can to alleviate inflation through successive interest rate rises. However, when it is supply-side costs that are the main source of inflationary pressure, rather than consumer demand, it will be interesting to see how effective interest rate rises are in taming it.

For the time being, this all creates sensitivity in the real estate sector, not only borrowing appetite, but also the pricing and returns that can be made from it.

There are still standout performers in Commercial real estate; industrial and logistics centres, data centres and multifamily are all really strong. There is also encouragement in the Office market and even in some parts of the Retail sector, where high street yields have tightened from 6.75% to 6.25% and retail warehouse yields have come down to 4.75%. On the flipside, shopping centres remain a challenging part of the market with yields still up at 7.50%, as this sub-sector continues to adapt to online shopping habits in particular.

The industrial sector has seen yields steadily tightening over a decade or more and these are now fairly stable, with any capital growth now resulting from higher rental levels. We have seen a reversal of the traditional relationship between industrial and retail yields, with retail yields tending to be higher than industrial. There are also structural shifts in the occupational market, in the office sector, with staff working from home, and in retail where we have the continuing challenge of repurposing space.

Combine this with the wider macro-economic picture, and it’s unsurprising that we have a degree of uncertainty as to where values are heading. However, uncertainty breeds opportunity and those are the exact conditions which attract prudent investors and provide opportunity.

The challenge with office space is to build in flexibility to react to market demands. Landlords need to make properties places where people want to work and want to travel to. This may mean including leisure facilities, collaboration spaces, meeting areas and hubs. London is ahead of the curve in this respect, understanding that humans need social interaction and buildings should reflect that. Right now, office yields are stable and trending towards positive. Of course, there are individual pockets where this varies based on the dynamics of a specific market and it is sensitive to local needs. But if you read the market right, there are definitely opportunities.

The residential market has shown itself to be extremely resilient and has managed to weather the pandemic as well as more recent economic challenges. The stamp duty holiday had a big hand in this, stoking demand and setting prices on an 18-month course of sustained increases. However, once the stamp duty holiday was removed it was assumed values would correct themselves, but demand continued and it’s only now that there are signs, anecdotally, that sentiment is starting to soften. Despite this, Residential remains a robust market, with market indicators produced by Nationwide and Halifax showing double digit annual growth, and Zoopla also reporting positive buyer measures.

Low supply has underpinned the market for some, although there are signs of increased volumes coming through. This is, however, unlikely to put a dent in the chronic long-term undersupply which we’ve seen. Mortgages are going to become more expensive, the cost of living is increasing significantly, and these factors will doubtless play a key role in setting the direction of the market in the near term.

At Aitchison Raffety, we are continuing to invest in our business and our people as we expand our valuation services across the country to meet the increased levels of demand from our clients. The dynamic, opportunistic market makes for interesting times in property, and our long track record, and experience of previous property cycles means we are well placed to assist you in all your real estate valuation needs.

For further information, please contact Ian Wimpenny, Director & Head of Valuation, on 020 7907 3708 or via email to ian.wimpenny@argroup.co.uk.