Green housing and lower consistent rents – the market in 2024
By Tom Jansons, development director, Jansons Property
It’s becoming a cliché that every year begins with experts expounding the uncertainty of the real estate market in the coming 12 months. But with 2024 looking like a transitional year politically and economically, it goes without saying that these changes will feed into our industry. And – cliched as it may be – 2024 is, undeniably, going to be another uncertain year.
We left 2023 on shaky ground, quagmired in a greater economic downturn, with plummeting volumes of commercial real estate investment, which saw a decade low that year. While 2024 looks like it will offer the opportunity to rebuild the industry on more solid ground, there are definitely big changes ahead.
It’s tricky to offer precise predictions in an environment that is inherently unstable – politically, geopolitically and economically – but perhaps by focusing on the trends and patterns we can confidently see coming, we’ll be able to orient ourselves for the year ahead.
‘Industry-wide’ will no longer apply
2024 will be the year when ‘industry-wide’ pronouncements will no longer apply. If you haven’t yet come across the terms ‘bifurcation’ or ‘trifurcation’ applied to our sector, then brace yourself as they look set to become the buzzwords of the year.
In regard to the real estate industry, bifurcation refers to a division or split in industry trends. This division can manifest in different ways from the divergence of property values, market conditions or investment opportunities. For example, a bifurcation where certain segments see a decline in demand while other areas remain relatively stable. This creates a split or divergence in the performance of different market segments and it’s only through awareness of the accelerating bifurcations can we make informed investment decisions. Understanding the factors driving the divergence is also essential to enable us to navigate the changing landscape of the real estate market.
As we move into 2024 we are definitely seeing a bifurcation – or in some situations a trifurcation (a separation into three distinct categories) – of assets into those that are ESG (Environmental, Social and Governance) compliant, or not. And those that are prime or non-prime.
These divisions are likely to become even more pronounced as the UK real estate market continues its transition towards net zero and the undersupply of both green and prime assets will be markedly reflected in their pricing.
ESG will become imperative
Pricing will also become more unstable as we enter a period of price discovery while the industry gets to grips with ESG compliance and its associated costs.
A challenging 2023 meant many businesses put achieving a full and thorough understanding of ESG and sustainability requirements on the back burner, but 2024 will see that understanding become imperative.
As this understanding deepens, the prices of many assets will become actively and dynamically determined by the interactions of buyers and sellers instead of relying on historical market knowledge. The market value of properties which are either ESG compliant or not, will be established predominantly by the behaviour of market participants in a way that’s impossible to accurately predict.
Non-ESG compliant, non-prime properties have seen their worth plummeting in a way that would have been unthinkable just a few years ago. Particularly we have seen some out-of-town office buildings trading at less than a quarter of their previously purchased value and the buyers tend to be for alternative uses such as residential, hotels, student and industrial. In Edinburgh, for example, we saw two office buildings on St Andrews Square hit the market and sell to hotel development. Whilst these are prime assets, they would have required considerable capital expenditure to become ‘ESG compliant’ so therefore the owners, who are large institutions, decided to sell for a discounted price.
Conversely the finite supply of prime stock that is ESG friendly in the office market is proving capable of achieving unprecedented rental value.
The volatility of this price discovery period is unsettling to investors, but the risk and cost associated with less sustainable assets will become clearer as we progress through the year. As the market settles, some assets will become increasingly attractive to opportunistic investors who are confident in their ability to profitably upgrade a building’s sustainability credentials. Therefore, an understanding of what those environmental requirements are is essential when making any commercial property decisions in 2024.
Landlords will consider more flexible options
I doubt it came as a surprise to many when chief executive of the British Retail Consortium, Helen Dickinson, announced in 2023 that Britain had lost 6000 retail outlets in the last five years. As we enter 2024, I believe we’ll see growing numbers of landlords considering more flexible options to minimise vacancy rates in retail properties.
By offering solutions that factor in the uncertainty of the year ahead, landlords and tenants will find themselves increasingly working towards a common goal through turnover rents.
Turnover rents – where a tenant pays a lower base rate rent, but supplements this proportionately when profits increase – are still relatively uncommon. But building owners are coming to accept the fact that retailers are more willing to take a risk on empty units if the base rent is lower.
A lower rent is seen as a preferable alternative to an empty property and any turnover rent payable over and above the base rent is directly linked to the store’s performance.
By becoming more closely aligned with their tenants’ commercial success, building owners are more likely to invest in place-making around their buildings and pay closer attention to the environment in which their assets sit. This collective ambition is good news for the built environment which will benefit from the collaborative effort of both tenant and landlord.
While the coming twelve months look uncertain in the wider sense, an awareness of the bifurcations taking place in the real estate industry, a thorough knowledge of the ESG landscape and the willingness to consider closer alignment with tenants to ensure mutual commercial success will help us navigate through the choppy waters of 2024 that lie ahead.
All we can say is ‘Bon voyage’!