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Welcome To An Old-Fashioned Supply And Demand Cycle

This time around, falling rates and yield compression are not going to save the industry.

With the prospect of multiple interest rate cuts in the UK receding into the distance, the next few years for real estate will be all about buying the right asset in the right market and growing the rent, the 200 attendees at Bisnow’s London Real Estate Leadership 2025 Forecast heard. 

There is good money to be made buying at what is still a cyclical low point. But investors in the sector will need to claw their gains inch by inch rather than relying on falling rates to raise values across the board. 

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Herbert Smith Freehills' Richard Forsdyke, British Land's Simon Carter, JLL's Stephanie Hyde, BlackRock's Paul Tebbit, Quadrant's Jeremy Lacey, Abrdn's Anne Breen and L&G's Bill Hughes

“I think we're moving into an old-fashioned supply and demand cycle for the asset class,” Abrdn Global Head of Real Estate Anne Breen said at the event, held at Quadrant and AIMCO’s OSMO Battersea office building. 

“It's not the GFC financial engineering. It's not the last period of time, where debt was cheap or free. It's how you can drive income in your asset, and what’s the supply of future-fit assets in the sector?”

The level of “exuberance” in the market last September following the Bank of England’s first rate cut in more than three years has diminished, BlackRock Global co-Head of Real Estate Paul Tebbit said. It has been replaced instead with a world where business plans must avoid being too binary. 

“This time last year, people were factoring in about seven rate cuts. Market assumptions this year, maybe we're factoring in one,” he said.

“Ultimately, what it probably tells you is your leverage isn't going to get a lot cheaper. It's not going to help, and your unlevered business plan is just having to work so much harder to deliver those returns.”

For value-add investors, that means being wary of assuming that core investors — largely absent in the past few years as buying bonds has looked more attractive — are going to come back into the market and buy assets at higher prices than they are valued at today. 

Tebbit added that while it is important to pick sectors that have demographic factors working in their favour, like rented residential, there might be less divergence between real estate asset classes than in previous years. 

“The last 10 years, no matter what logistics asset you owned, you delivered a return of 20%-plus,” Tebbit said. “That's not going to be the case for the next part of the cycle. It's about the security of the income, the quality of the asset driving the income. Therefore, the sector polarisation will narrow. It won't go away, but it will narrow quite substantially.”

While a concerted upswing in values may have been deferred, that doesn’t make it a bad time to buy. It's quite the opposite, the audience heard. 

“From a BL perspective, we don't try to call the cycle precisely to a quarter. That's kind of a mug's game,” British Land CEO Simon Carter said.

“There are tight occupational markets with very little built, so we're looking to put money to work. And if we can get a 7% yield on cost on our developments, we can buy retail parks at 7%, [and] we feel we're going to hit our cost of capital or exceed our cost of capital. I think we will look back on ’24 and ’25 in three years’ time and think, ‘That was a good time to put money to work.’”

In terms of what will be in vogue in 2025, living sectors, life sciences and data centres are the most interesting clients, JLL UK CEO Stephanie Hyde said, adding that occupier demand for quality offices remains strong.

As far as the investment market for offices is concerned, a lack of consensus on the panel mirrored the lack of consensus in the market. Tebbit argued that investors across the world still feel they were overallocated to offices, with a large volume of sales still to come that would push down prices. 

Carter, on the other hand, said the combination of strong occupier markets and suppressed prices presents an opportunity. 

While the outlook might not be as clear at the start of 2025 as hoped, Hyde said it is not as bad as many are making out. 

“I actually think what we need to think about as an industry is how we don't talk ourselves into a problem, because there is a lot of cash around,” she said.