INSIGHT
Economic and property market review
March 2023
DATA & ANALYSIS
MARKET CONDITIONS
Economic trends
- The UK government has made progress on rebuilding its reputation in the eyes of the financial markets, thanks to a return to an orthodox fiscal policy. Having reached a low point of $1.07 on the 28th September 2022, the pound had rallied to $1.21 on 28th February 2023. 10-year Gilt yields stood at 3.8% on 28th February, down from the 10th October 2022 peak of 4.5%, but up on the end of January (3.4%).
- The UK economy is currently caught between the impact of high inflation, which is squeezing incomes, and the Bank of England having hiked interest rates ten times in order to tame price rises. Inevitably, the steps taken to tackle inflation have had a negative effect on growth. UK GDP contracted q-on-q by -0.2% in Q3 2022, then stagnated in Q4.
- Recent months have seen the economy move into a ‘stop, go’ pattern, where GDP has alternated between growth and contraction on a month-on-month basis. October 2022 saw GDP growth rebound to 0.5%, then slow to 0.1% in November and turn negative by -0.5% in December.
- CPI inflation eased to 10.1% in the year to January 2023, down from 10.5% in December 2022. Many commentators believe that inflation will now trend downwards, particularly as the October 2022 energy price cap increase is in the figures.
- At the February meeting of the Bank of England’s Monetary Policy Committee (MPC) the decision was taken to increase the UK base rate by 50 bps to 4.00%. We believe the base rate is now at or close to its peak for this hiking cycle.
- The unemployment rate was 3.7%, which is unchanged m-on-m but above the 3.6% seen in September. This is low by historic standards and indicates a tight labour market.
- The IHS Markit composite Purchasing Managers’ Index (PMI) saw a surprise rebound in February, rising to 53.0 from 48.5 in January. A reading of above 50.0 suggests the economy is expanding.
- GfK's consumer confidence index stood at -38 in February, up from -45 in January, reflecting the recent easing in the rate of inflation.
Property market
- Oxford Economics is currently predicting -0.4% GDP growth in 2023, then 1.5% in 2024 and 2.5% in 2025.
- Recent months have seen the UK property investment market move into a downturn in the face of rising interest rates and the slide into recession. Occupier markets are holding up for now, but we expect to see evidence of a slowdown next year.
- Some open-ended property unit funds have imposed restrictions on the payment of redemptions, which is usually a sign of investor uncertainty. This will probably lead to some stock coming to the market for sale as the funds move to raise cash.
- Rolling investment volumes across the UK in the year to December 2022 totalled £60.2 billion, which is down on the November figure of £66.8 billion, but just ahead of the long-term average of £59.6 billion. Sales volumes in recent months have been ebbing.
Offices
- Office rental value growth decelerated in January 2023, with the MSCI Market Rental Growth Index for offices contracting by -0.09%, compared to 0.09% in December 2022.
- The MSCI capital value growth Index for Offices decreased by -0.8% month-on-month in January 2023, compared to the December 2022 figure of -3.3%.
Retail
- In February 2023, UK retail footfall was 11.0% higher than the same month in 2022, according to Springboard. Compared to February 2019, footfall was down by -12.5%.
- Retail capital values are declining with the MSCI index falling by -0.5% month-on-month in January, compared to -2.7% in December, marking the seventh consecutive negative monthly figure.
Industrial
- The MSCI industrial rental growth index grew by 0.51% month-on-month in January 2023, compared to 0.54% in December 2022.
- Given the growing significance of ecommerce to the industrial market, it should be noted that online shopping sales value fell by -9.2% in the year to January 2023 and was down -2.1% month-on-month.
- The MSCI index for industrial fell by -0.8% month-on-month in January 2023, compared to -5.0% in December 2022, its seventh consecutive negative reading.
Outlook
- For both the commercial and residential property markets the high level of economic uncertainty and evidence that prices are correcting have encouraged a ‘wait-and-see’ attitude among real estate investors. In many markets there are reports of a mismatch between buyer and seller expectations on pricing.
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