2022 has seen an increase in demand for office space, as businesses look to rent more UK commercial property.

Respondents to a recent RICS survey have shown a notable increase in UK office space in the first quarter of this year with the net balance improving to +30% from what was a very bleak picture at the end of 2021.

We have also seen changes in the retail sector during the same period as occupier demand moved into a more stable area at (-1% net balance), the first time this reading has been neutral or positive since the beginning in almost 5 years.

The commercial property sector as a whole has seen an increase in occupier demand across all asset classes (retail, office and industrial uses).

We have also see an increase in Investor enquiries for the first part of 2022, with the strongest figure since Q3 2015. Moreover, for the first time since 2017, investment enquiries are now in positive territory across each of the three traditional market sectors separately (office, industrial and retail).

Investor demand for office space rose in 2022

The investor demand for office space rose from a net balance of +5% at the end of 2021 to +23% in Q1 2022, and the net balance of respondents predicting a rise in capital values for the prime office sector is the most positive since Q4 2019 (+37% net balance).

With the jump in occupier demand for new office space, rents are expected to rise with a net balance of +19% expecting a rise, compared to +7% in the last quarter.

On a regional level, rent for office space in central London are anticipated to outpace most other UK regions, while the South East remains the only region in which secondary office space is predicted to see growth.

The office sector is showing strong signs of recovery

The survey feedback shows demand from both occupiers and investors gaining momentum over the quarter, with the office sector in particular now showing signs of recovery.

This has led to an upgrading in expectations for capital value and rental growth across prime offices, while the prolonged downward trend in portions of the retail sector also now appears to be easing.

There are some challenges however given the current headwinds facing the UK economy in the form of sharply rising energy prices, higher interest rates and general cost of living pressures, there is understandably a lot of caution regarding the potential impact this could have on market conditions going forward.

Build-to-Rent (BTR) homes in the UK have increased by almost 20% over the last 12 months.

The number of build-to-Rent (BTR) homes across the UK has increased by 19% in the last 12 months, according to the British Property Federation.

This means that the total number of BTR homes that have now been delivered in the UK stands at 72,668 which is up from 61,000, just over year ago.

The spread across the UK is as you would expect with London seeing 5,802 new homes being delivered and the regional cities taking the remaining 5,866 homes.

The construction and planning pipeline shows us that the existing market growth will be sustained in the short to medium-term, with a total of 46,304 homes under construction at the end of quarter one, which is up 14% year-on-year, while new residential units in the planning pipeline are 11% higher than 12 months ago.

This level of growth demonstrates just how rapidly the UK Build-to-Rent sector has grown and continues to expand. The number of completed homes increasing by around a fifth in a single year which is a huge leap and suggests that the sector is making a strong contribution to UK housing delivery.

From an investment perspective, this shows that there is long-term demand for rental homes in the UK which means that the sector’s prospects remain very positive. Although there are some concerns nationally caused by build cost inflation, the sector’s planning pipeline continues to grow, and we are seeing a shift towards larger-scale development as investors recognise the immense shortage of high-quality homes in many towns and cities.

The Build-to-Rent sector is already making an important contribution to national housing delivery. Expansion into new locations can help address the shortages of rental stock seen up and down the country, while the growth of single-family housing provision, an area of significant under-supply, is the next stage of growth for the sector. The sector has also seen a shift towards family housing in urban fringe locations which has seen the delivery of much needed family accommodation on the out skirts of major conurbations. This is a strategy which has been adopted by Ecotek Homes who have been acquiring sites throughout the UK to deliver much needed low carbon, affordable family housing through their off site modular solutions.

Affordable Homes, Tackling The Crisis

Legal & General have made plans to invest over £2bn of funds into affordable UK homes over the next five years.

Our Team at UKDC have estimated that over 140,000 new affordable homes are required and need to be built every year in order to meet the increasing demand. To demonstrate the scale of this task, over the last 12 months only 45,000 were delivered across the UK, a third of what was required.

Legal & General have risen to the challenge and have announced this week that they will invest additional capital to help create more than 10,000 new homes nationwide through their Retirement Institutional business (LGRI).

The investment is being made through the Legal & General’s Affordable Homes business and will help to tackle the shortage of affordable housing that currently exists in England.

LGRI made a first £100m funding commitment to affordable homes in 2020. Last year a further £270m was committed to investing in 1,400 new affordable homes across the UK, to be delivered by 2024.

LGRI are also set to invest a further £2.5bn into the built to rent sector over the next 5 years whilst they are also committed to a sustainable future by pledging that all new affordable homes they deliver will be net zero carbon by 2030.

Life Science REIT Agrees £150m Deal With HSBC

Life Science REIT, is a real estate investment trust which is focused on the growing life science sector within the United Kingdom. This deal has seen an agreement of £150m of debt financing being reached with HSBC Bank.

The interest rate in respect of drawn amounts of 225 basis points over SONIA, is currently equivalent to a total cost of 2.9 per cent which is comparable to that of institutional grade borrowing.

While the facility is currently undrawn, this will give the company additional financial resources as it continues with its plan of investing in and purchasing life science assets across the Oxford-Cambridge corridor and London.

The borrowing structure allows Life Science REIT to add new properties its portfolio in order to reach its optimal gearing target as it acquires new assets.

The company has a prudent approach to gearing and is targeting a LTV ratio of 30 per cent – 40 per cent over the longer term.

The debt facility announced this week provides Life Science REIT with the flexibility to improve the efficiency of their balance sheet as they continue to make progress on a number of acquisition opportunities whilst also enhancing their financial resources.

This shows further confidence in the Life Science sector in the UK as an emerging commercial real estate asset class, a sector which continues to grow year on year. It is estimated that that there is up to £15bn of capital allocated to UK life sciences real estate, of which less than 10% has been deployed to date. There is a clear and strong case for land owners and developers to deliver assets within this sector which has seen 166% increase in the last 3 years according to JLL.

The Team at UKDC believe that around £65bn has been allocated to the Life Sciences real estate sector globally, with around 23% of this earmarked for the UK. Venture capital raised on a global scale for life sciences has also increased from £14.6bn to £26bn in 2020 according to the BioIndustry Association, driving occupational demand in the sector.

The United States still remains the largest Life Sciences real estate market where institutional investment into the sector is well-established. The sector has been expanding across Europe with the UK at the forefront of this growth with a number of established clusters and hubs including Oxford, Cambridge and of course London.