"Looking more specifically now at real estate investment asset classes, it seems likely that the challenges that have dampened demand for buy-to-let investments will remain in 2024"
- Jatin Ondhia - Shojin
The past two years have presented significant challenges for the property market. The tight grip of persistent inflation and the upward curve towards a 15-year high in interest rates have impacted consumers, investors and businesses alike.
With the cost of borrowing rising sharply, buyer demand and spending power waned last year. Consequently, average UK house prices fell by 2.1% in the 12 months to November 2023.
Housebuilding activity also suffered from the economic turbulence that has defined the past year or so. Figures released by the National House Building Council (NHBC), for example, show the number of new homes registered fell by 53% in Q3 2023, compared to the same period last year, with the number of new homes completed falling by 15%.
It was, to use posh language, an annus horribilis – to put it more simply, 2023 was tough, and many investors will be happy to see the back of it.
And so we arrive in 2024 with the hope for a more positive (and tranquil) year ahead. With that in mind, here are some of the most interesting trends to watch for when it comes to real estate investment in the next 12 months…
1. Where will interest rates and inflation go?
The first inflation print (Consumer Price Index) of 2024 delivered a shock. Inflation rose from 3.9% to 4%, whereas the markets had widely expected a slight drop.
It was a timely reminder that while inflation has fallen significantly over the past six months, the government and Bank of England (BoE) still have work to do to fully crush the cost-of-living crisis. Nevertheless, The Oxford Economics consultancy and analysts at Investec and Deutsche Bank are all predicting that inflation will drop below 2% (the BoE’s target) by the midpoint of 2024.
The dance between interest and inflation has dominated economic discourse since 2021. Falling inflation will grant the BoE the green light to bring interest rates back down.
The latest Monetary Policy report says rates are expected to remain around 5.25% until autumn 2024 and then decline gradually to 4.25% by the end of 2026. However, the markets are pricing in faster falls than that – some suggest that the base rate could fall below 4% by the end of next year instead.
Either way, all signs suggest that inflation and, in turn, interest rates will come back down this year, loosening their chokehold on the economy and creating new opportunities for investors as they consider how to manage their portfolios.
2. Planning reform is on the horizon
Planning will undoubtedly remain a prominent topic of conversation in 2024, so real estate investors will need to keep a keen eye on what reforms are proposed.
The government has already introduced the Levelling-up and Regeneration Bill to streamline the planning system, incorporating changes such as digitised planning processes, reinforced environmental safeguards, and mandatory design codes. Concurrently, initiatives have been unveiled to expedite build-out, clarify housing targets, and simplify local plans.
Meanwhile, Labour's considerations may encompass potential changes to the Green Belt, reforms to the planning system, and the establishment of new local development corporations. Indeed, Labour’s policies take on added weight, given what lies ahead this year…
3. Watch out for the general election
We are still awaiting confirmation of when it will occur, but we know the next general election must be held before the end of January 2025. A date in the second half of this year seems most likely.
Planning, housing, and taxation will all likely feature in the debates that precede the vote. In truth, it is the rhetoric of the opposition, rather than the incumbent, that is likely to carry extra weight – after all, the latest polls show that 46% of UK voters plan to back Labour, compared to 22% for Conservatives.
At this stage, everything is on the table. From income, inheritance and capital gains tax to housebuilding investment, planning reform and infrastructure projects – a wide range of points relating to property and impacting real estate investors could surface over the coming months.
For now, we can say that investors should unquestionably monitor how the Conservative and Labour manifestos take shape, eyeing how policies might impact their current or future investments.
4. Demand for buy-to-let will continue to fall
Looking more specifically now at real estate investment asset classes, it seems likely that the challenges that have dampened demand for buy-to-let investments will remain in 2024.
The rise in interest rates has had a well-documented impact on landlords, squeezing their profits and, in many cases, encouraging landlords to exit the BTL market.
For instance, data shows that BTL investors bought about 11.2% of all the homes put up for sale in 2023, compared with the 15.7% bought in 2015. Moreover, some 15% of landlords are considering selling up due to rising costs associated with their property, data from Cornerstone Tax has revealed.
Those higher costs – most notably in the form of BTL mortgages – have been compounded by tightening regulation in the private rental sector. While the base rate may fall in the second half of 2024, interest rates will remain far above the levels that many landlords had become accustomed to between 2008 and 2022.
5. What is in store for debt-based real estate investment?
As the appeal for BTL investing wanes, opportunities emerge for other forms of real estate investment. In particular, debt-based real estate investment – peer-to-peer, crowdfunding and co-investing platforms, most notably – could attract interest from private investors.
Here, the possibility to earn pre-agreed returns over a specific time period may appeal to investors keen to make short- to medium-term investments, which are still embedded in the property sector but without the cost and complexity of buying an asset themselves.
More generally, alternative investments such as these could form a part of investors’ portfolios, with diversification likely to remain a prominent trend in 2024. A balance of savings products and lower-risk investments will, for many investors, be balanced alongside some higher-risk investments, providing the opportunity for greater growth.
6. Sustainability to remain a hot topic
Ending on something of a safe bet: sustainability is likely to remain a hot topic in 2024.
From large development projects to individual residences, construction will prioritise green energy-efficient building practices. Moreover, homeowners, renters and buyers will place greater and greater emphasis on the energy efficiency of a property, with a plethora of data underlining how green credentials are becoming ever-more influential in people’s decision-making.
Legal & General, for example, found that buyers will pay up to 20% premium for low-carbon homes. Meanwhile, tenants are willing to pay a 13% premium for an energy-efficient home.
Investors and developers will need to ensure their real estate assets can meet buyers’ and renters’ sustainability demands. For investors who are pursuing a debt-based investment model – such as backing a property development project through a co-investment platform – it is important they assess the projected energy efficiency of the end product; this will help determine the level of demand that can be generated for the completed asset, underpinning the feasibility of the development itself.
Balancing challenges and opportunities
Clearly, the challenges of elevated inflation and interest rates have not dissipated simply because we have moved into a new year. But there is a greater sense of optimism across both the property and investment sectors – the economic conditions have improved compared to last year, and this ought to allow investors to reassess their outlook for the year ahead.
House prices may have softened, and the traditional BTL investing model may be under continued threat. But bricks and mortar will no doubt remain a prominent asset class within investors’ plans for 2024. The key, then, is to seek out the right opportunities at the right time. Monitoring the trends outlined above will hopefully help investors as they weigh up those decisions.
