Marios Hajiroussos, CEO of Consulco Group, explains why rising interest rates and last year’s political instability in the UK may mean that now is the perfect time to invest in commercial and residential property, before prices begin to bounce back. He also reminds investors about the importance of diversifying their holdings.
How would you describe the investment outlook for UK real estate in 2023?
In the short-term, UK commercial real estate values were hit hard in 2022 as interest rates rose and political instability increased. But our London real estate experts believe that this has created a short window of opportunity to acquire investments in both commercial and residential property at discounted prices.
In the long-term, property investments have proven to be resilient against global and local headwinds and have provided strong long-term returns for overseas investors. Despite Brexit and seven years of political turmoil, during which the country has seen five prime ministers, the property market continues to attract capital from across the world.
We believe that the first six months of 2023 will see further uncertainty as the Bank of England continues to tighten monetary policy with additional interest rate rises. With inflation forecast to remain high, many investors may pause or turn away from the UK. However, we expect the ‘fog’ to rise in the second half of the year, with inflation falling and interest rates stabilizing – in fact, medium- and long-term rates may well start to fall before the year end.
So, with lower prices and limited demand, now is the right time to be brave and to seek out well located commercial property investments.
Is it possible that new environmental legislation could have a significant impact on real estate valuations in the future? How seriously does it affect investors?
The Energy Performance Certificate (EPC) is a requirement for all rental properties in England and Wales. It shows the energy efficiency of the property, as well as useful information on how you can make it greener and more efficient. It serves as a legal requirement for landlords and is essential for potential buyers or tenants.
The government announced new standards for England and Wales, to become law by 2025. From this date, all rental properties will need an EPC rating of C or above. As before, these new regulations will apply to new tenancies first, followed by all tenancies from 2028.
The changes are intended to make homes and commercial buildings much more energy efficient and reduce carbon emissions, to help the government reach its net-zero by 2050 target.
The penalty for not having a valid EPC will be raised from £5,000 as it now stands, to £30,000 by 2025 – so this is not something we can ignore.
In many circumstances, small changes can be made to improve the rating. These may include changing light bulbs to installing double glazing. More radical solutions include replacing gas with electric boilers and installing air-source heat pumps.
The key thing is to seek advice at an early stage and to implement any changes required.
What is the most profitable type of real estate one could invest in, in the UK right now that one can invest in?
Property investments can provide both income and capital growth – and profitability is always linked to risk. Residential property in London currently provides a net rental income of 3.5 to 4.5%, whilst commercial property in London can return an annual income of 4.5 to 6.0%. Outside London, commercial property returns are even higher, 6.0 to 9.0%.
However, residential properties are forecast to grow in value, whilst commercial property values are likely to remain steady in the short to medium term. In addition, it is possible to buy a well located flat in central London for £600,000 – but the cost of a commercial property with good growth prospects is likely to exceed £1,500,000.
At Consulco, our experts meet prospective investors, discuss their risk appetite, review investment sums, and advise on the best sector/location – on a client-by-client basis.
Property prices in central London have fallen by 24% in real terms over the past five years. When is the market expected to bounce back and what kind of returns can a long-term investor of real estate in the UK expect in the coming years?
We expect London residential property prices to rise in 2024 onwards. Whilst prices rose strongly outside London during COVID, the core market remained subdued. However, price falls in Central London are expected to be limited this year – just 2 to 3% – whereas prices beyond the capital are forecast to fall by 5 to 8%. Nevertheless, this correction is expected to be short-lived with all areas enjoying price growth from 2024 onwards.
It is very difficult to acquire property at the very bottom of the market cycle and with values forecast to grow by 13.5% in prime Central London over the next five years, savvy investors should buy residential property now.
If a long-term investor, looking for returns with a 10-year+ outlook and willing to invest €5 million in real estate in the UK, were to appoint you as his/her investment consultant, how would you advise him/her to structure the portfolio?
We would generally advise investors to diversify their holdings rather than put all their eggs in one basket. A UK property investment portfolio might contain credit investments (that provide a solid income return but no capital growth), an apartment located in an area expected to outperform the market as a whole – such as Elizabeth Line stations – and units in a syndicate or fund that acquires commercial property investments.
(interview as featured in GOLD Magazine's February issue)