Outlook 2024: Sector outlook

The ‘flight to rural’ during the pandemic period saw a rush for more space, better value, and quieter living amid rising flexible working patterns.

House prices in many countryside and seaside locations rose dramatically as a result. Locations such as Cornwall, Devon, Dorset, Norfolk and Wales saw house prices rise by 25-35% over a 30-month period between 2020 and mid-2022. And while urban centres also saw strong price growth, this did not match the rates seen in many rural areas.

An analysis of ten rural counties across England indicates average house prices rose by 27% over the period, whereas England’s top 10 urban centres showed house prices rose by 20% over the same period.  

The practice of more flexible or hybrid working following the pandemic is now more widespread than ever. Prior to the pandemic it was estimated that around 28% of London office workers were spending one day a week working from home (Centre for Cities), while various research studies suggest that UK employees now spend on average less than three days per week in the office. This, together with strong demand and high house price growth in rural areas throughout 2021 and 2022 means that more people may now be living further from the office and commuting extended distances as a result. However, as many companies seek to encourage workers back into the office more frequently, we may be on the cusp of a reversal of these patterns.

Preliminary analysis of the same rural counties versus urban centres shows there has been at least a small perceptible change in house price growth between them, with urban locales showing slightly higher growth rates than the rural areas over the last year. Albeit the percentage point difference is small, it may still be the first indicator of changes ahead: urban locations posted an average 3% house price growth in the 12 months to August 2023, while the rural areas posted no growth, marking a dramatic turnaround compared with the growth seen throughout 2021 and the first half of 2022. And while the housing market and rising interest rates will have had an impact on this, the difference between rural price growth and urban price growth may well be a post-pandemic effect.

For 2024 we expect this trend to continue. While flexible and hybrid working is here to stay, the number of days per week that people are going into their place of work is gradually increasing. We expect that businesses will further try to encourage workers back to the office more often. In some extreme cases this may result in some homeowners opting to move back closer to their urban workplace, and at the very least we expect that the flight to rural and countryside locations will continue to reduce. We therefore expect urban centres to outperform in terms of house price growth over the medium-term horizon.

The Renters Reform Bill 2023 aims to redress the balance between landlords and tenants, in the biggest change to the private rented sector for many years. Most controversially, it will change the way in which landlords are able to evict tenants by abolishing the ‘no fault’ Section 21 measures. 

The Bill was finally introduced to Parliament in May 2023 (having been promised since 2019), with a target for Royal Assent in June 2024. It has progressed past its second reading, despite some backbenchers attempting to delay the abolition of Section 21. The crux of the debate centres around whether the abolition of no-fault evictions could further undermine the sector with landlords opting to leave as a result. 

Private landlords have been plagued by tax rises and increased regulation for many years now, which has resulted in swiftly dwindling supply as thousands have left the sector (possibly upwards of a quarter of a million rental properties have been sold since 2016, according to analysis of UK Finance figures). This shrinking supply, at a time when tenant demand has increased steeply, has resulted in double-digit annual rent rises, and in many areas, rents have risen by over 20% in just two years. This is creating a major affordability issue for renters. 

The Renters Reform Bill will certainly offer tenants more security and flexibility of tenure. However, we believe that the overall impact of the legislation will be to accelerate the rate at which private landlords exit the sector, particularly those with small portfolios. This will further reduce the already compressed available supply and will put renewed strong upward pressure on rents. On balance, therefore, we believe the legislation will leave tenants with less choice and higher rents.

Our full coverage and thoughts on the Bill can be found here >

The outlook for the UK life science sector in 2024 is optimistic, with strong employment and venture capital investment growth prospects. Real estate in this sector is set to become more dynamic, with increased demand for lab space and energy-efficient facilities. There remains a significant opportunity for UK institutional investors to engage more deeply with this sector to close the gap with the levels of investment seen in other markets.

We expect the life sciences sector to maintain its growth trajectory, with employment growing at a faster rate than in the broader economy. The ‘Golden Triangle’ (Cambridge, London, and Oxford) will continue to dominate, yet other cities are also gaining traction in attracting investment, including Manchester, Edinburgh, and Birmingham, as well as locations such as Stevenage. The UK's ambition to be a ‘Science Superpower’ by 2030, underpinned by government R&D funding, the recent re-joining of the Horizon programme, and a possible regulatory review post-Brexit, will likely bolster the sector's growth further.

Demand for lab space is outstripping supply, particularly in established hubs, which will likely continue into 2024, driving laboratory rents up.

Labs are intensive energy users, and there is increasing demand for energy-efficient space, driven by rising energy costs and the push towards net-zero carbon goals. This may result in an amplified focus on developing energy-efficient real estate for life sciences.

Recent supply chain challenges have underscored the UK's over-reliance on overseas markets for drug manufacturing. With only 25% of medicines produced domestically, there is potential for growth in onshoring, reshoring, and nearshoring operations. The UK's highly skilled workforce positions it to attract advanced therapies manufacturing.

The availability of risk capital in the UK for investment in life science companies reflects a mixed landscape as we look towards 2024. Despite a record-breaking year in 2021 for funding into life sciences, 2022 and 2023 saw a decrease in funding. This decline was attributed to economic uncertainties that affected costs, supply chains, and planning. However, this did not signify a withdrawal of interest but rather a strategic pause, with pent-up capital expected to re-enter the market.

A significant pool of capital has been drawn by the UK’s life sciences sector over the past three years, yet not all of this has been utilised. This gap suggests a cautious approach from domestic institutions, which contrasts with the robust funding seen in other markets, particularly the US, which has a well-established institutional investment framework for life science assets.

The UK sector's growth, backed by government support and record levels of equity finance, indicates a promising future, yet it underlines the potential for UK institutional investors to increase their engagement to match the sector's growth and the global investment landscape.

While there is a notable pool of risk capital available, the uptake by UK institutions has been conservative compared to other markets. We view the recent slowdown in funding as a temporary recalibration rather than a withdrawal, setting the stage for renewed activity as market conditions stabilise.

The UK logistics backdrop is one of subdued consumer confidence and the near flatlining of household expenditure. In addition, the proportion of overall sales accounted for by online retailing has been static over the last year, suggesting the transition online has stalled (if only temporarily). Therefore, logistics occupiers will be in a relatively cautious mood in 2024. 

Some major occupiers took on more space than they needed during the demand boom of 2020-2022, buoyed by pandemic-specific factors as well as longer-term shifts. 2023 has seen a return to take-up levels more similar to those seen during the five years prior to the pandemic, which were above longer-term averages. 2024 should see this level of demand continue. More high-quality stock should come onto the market as subleases during 2024 as occupiers release surplus space, a welcome boost to supply in key locations where vacancy is low. 

Developers continue to face a host of challenges, from elevated finance and build costs through to planning delays. Despite this, activity was alive and well in 2023, with further speculative big box units due to be delivered in 2024.

Occupying buildings with the right specification will be ever more important, as occupiers adapt to new requirements. For example, the government recently introduced legislation to allow longer lorries, following a trial period. This will permit semi-trailer combinations of up to 18.55 metres, 2.05 metres longer than the standard size. Whilst clearly beneficial in terms of HGV capacity, the size / shape of some warehouse yards is proving challenging, and this will be a greater consideration going forward.

Amazon recently started testing “Digit”, a human-like robot that can replace some manual tasks, an example of how technology will continue to influence the design and operation of warehouses. Further acceleration in the use of technology looks set to take place, encouraged by a shortage of labour in many key locations, coupled with the need to improve the speed and reliability of deliveries whilst containing costs. 

A lack of grid capacity is becoming ever more evident, with power requirements from operators increasing, and schemes that are highly energy efficient with access to sufficient power should do well. More older buildings are being refurbished to high energy efficiency standards including on-site renewable energy. 

Last mile delivery units will continue to be in strong demand, and it remains challenging to satisfy this market given its location-sensitivity. It is interesting that several multi-storey schemes are now moving forward. Perhaps 2024 will be the year in which this concept, commonplace in parts of Asia and the US, takes off in the UK.

Occupier demand for open storage sites has risen exponentially in recent years. Our monitoring shows an increase in enquiries from just 300 acres in 2019 to more than 2,000 acres in 2022. This figure is likely to have exceeded 2,500 acres in 2023. 

Demand will continue to be strong in 2024, focussed on high-quality class 1 sites, with features such as excellent vehicle access, concrete surfacing, and high security levels. This will be buoyed by corporates requiring more sites to charge their expanding electric van and car fleets, as well as ongoing demand from logistics and parcels operators.

With structural undersupply in urban areas and double-digit rental growth over the last two years, investor appetite to enter the open storage sector will remain strong in 2024. However, some who made significant purchases in 2023 may pause activity while they assess their portfolios and develop strategies to increase rental income. Open storage portfolios have been trading at a premium, and this trend is poised to continue in 2024.

We expect further rental growth in 2024, albeit at a slower pace than the last two years. Prime rental levels in the regional markets remain well below those in London and the South East, by typically 40% across the locations we monitor, and therefore have the greatest potential for uplift. 

Valuing open storage sites is challenging, as relatively few property professionals have sector-specific experience and there remains a lack of data, a situation we expect to improve over the next year. As the market grows in scale and increasingly forms part of institutional portfolios, it will become more important to value open storage as a use in its own right, taking into account the quality of sites.

With some commercial developments on hold in 2024, more consideration may be given to open storage as an interim use, although the capital expenditure required to create a high-quality site normally requires several years payback. Given the favourable shifts in open storage rents compared with other sectors, 2024 could see more investors re-evaluate how this use could work in higher-value locations over the longer term.

The agricultural land market has had another positive year, and we do not expect the market to falter in 2024. All types of agricultural land gained value in 2023, even in the face of high inflation and rising borrowing costs which have put downward pressure on many other property sectors. This illustrates the agricultural land market’s relative resilience to economic fluctuations.

The market has not been completely unaffected, however. We have seen an uptick in debt-driven launches bringing more supply to the market in recent months, and growth in capital values has slowed. Yet, the prominence of cash buyers means that land values are less exposed to increasingly expensive debt than other property markets. Significantly, many landowners have sold land for development purposes over the past couple of years and need to ‘rollover’ the funds within a three-year timeframe to defer Capital Gains Tax. As a result of supply levels being historically low, many of these sellers have not yet found a new asset, resulting in a pool of ‘waiting cash’.

Furthermore, evolving natural capital markets are bringing an increasing array of purchasers to the market. With the introduction of mandatory Biodiversity Net Gain expected in January 2024, the number of natural capital buyers will accelerate. It will also offer opportunities for landowners who wish to diversify their income streams.

The agricultural sector will be paying close attention to the pledges made by political parties in the lead-up to the election. Over the past year, we have been monitoring responses to changing support payments and concerns about food security, and this scrutiny is likely to intensify in the coming year. There has also been speculation surrounding the political parties looking to axe agricultural property relief for inheritance tax, although this change is now looking less likely.