Big challenges remain for CRE development viability in the UK
Since our previous report on UK commercial real estate a year ago, construction materials price inflation has retreated rapidly and supply chain bottlenecks have eased, reducing pressure on construction costs.
Some are therefore asking if this is a good time to get back into the market and re-initiate development activity. But we think a widespread pick up in development activity is unlikely.
What you will learn:
- New development looks difficult to justify without underwriting strong rental growth. We estimate that developers would need 7%-9% per annum rental growth for a typical office, logistics, or residential scheme to be viable. This is more than double our UK CPI forecast over 2023-2025.
- Financial pressures from surging material costs and supply chain disruption are easing in the UK. However, material prices are still almost 50% higher than pre-pandemic levels and wage growth remains strong.
- The transition to net-zero and the effect of workforce ageing on labour supply are both likely to push construction costs up over the medium term.
- In the short-term, the scale and likely persistence of recent interest rate rises is the chief headwind to development activity, placing a premium on new space in the market.
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