Henry Boot 2023 - Our Markets

Our Marketplace

In 2023 our three key markets were impacted by a slowing economy, stubbornly high inflation and rising interest rates. Whilst transaction volumes reduced in all our markets, they showed their resiliency with continued demand for our high-quality buildings and prime projects, albeit not at the same levels as previous years.

We still believe our markets are driven by long term trends such as retail moving online, population growth and the success of the main cities in terms of economic growth, education and health provision, leaving us with continued conviction that these markets will drive our growth and performance.

KEY LONG-TERM STRUCTURAL TRENDS

Urbanisation

According to the UN, the population of the UK will have grown to approximately 71.7m by 2050 with 90% of the population living in urban areas. Given expected population increases over the long term, major cities will be a key driver of UK growth with a corresponding increase in demand for housing and high-quality office space. People do not choose to live in cities merely to be close to work, but rather because of the lifestyle benefits provided by accessibility to amenities. Research by Centre for Cities shows that being “close to restaurants/leisure and cultural facilities” is by far the biggest factor in determining city centre residents’ location decisions.

Technology

The digital landscape is constantly evolving and will disrupt how we live, work, shop and communicate, leading to a greater requirement to deliver services that adapt to the emergence of new technology, but also the environment in which they do it in. In real estate, there has been greater use of property technology for data and analytics as well as to help automate and streamline tasks resulting in increased demand for warehouse space from third party logistics operators, online retailers and manufacturers. The emergence of AI also has enormous potential to reshape real estate including the emergence of new markets.

Demographics

The UK’s population continues to grow, albeit at a slower rate than previously, with low birth rates and people living longer. However, the most significant change in the working age population over the next 20 years is for 20 to 30-year olds and 40 to 50-year olds who are expected to increase by 4.1% and 4.3% respectively. Demographics therefore provide positive support for senior living and BtR aimed at young professionals.

Environment

The built environment contributes an estimated 25% of the UK’s carbon emissions, which increases the pressure on businesses in our industry to adapt their operations to become more sustainable. This, alongside the need to reverse environmental degradation has created higher demand for energy efficient green buildings with a rising brown discount for buildings that do not offer such characteristics.

Our Focus Market

Market Overview

Warehouse take up has slowed over the last year, with volumes declining by c.30% to 44.5m sq ft in 2023 according to Gerald Eve. Whilst this is a reduction in demand from 2022, annual take up is now back in line with the pre-COVID levels of 2015-2019, after the pandemic sparked substantial demand for warehouses from online retailers due to a large spike in internet sales.

Gerald Eve believes that e-commerce remains a long term structural driver of demand for logistics space, with the emergence of other businesses that will also make an important contribution, such as green energy production and EVs as well as companies near shoring operations to improve supply chain resilience.

High street retailers are also looking to upgrade their logistics to more sustainable accommodation as well as increase their e-commerce offering.

Industrial rental growth remained strong in 2023, with the sector delivering rental growth of 6.9% according to the CBRE UK Monthly Index, which was the highest within the commercial property sector. Industrial property capital values also increased by 1.4% against value declines in both retail and offices, reflecting the limited supply of high-quality warehouse space.

Warehouse take-up and availability

Annual rental growth

Market Overview

The latest housebuilding figures show that the Government has continued to fall short of its annual target to build 300,000 new homes in England, which reflects the delays and uncertainties caused by the planning system. According to Glenigan, in 2023 a total of 264,994 plots achieved planning permission, a decrease of 18% on the prior year. Whilst the Group has good levels of stock with planning permission to meet demand from housebuilders as the delays in achieving planning continue, the Government needs to carry out much-needed reform of the system. The complexity of the system not only affects the housing and commercial market, but also investment and productivity in the UK.

The UK housing market remained subdued during 2023 with house prices decreasing by 1.8% according to Nationwide. Lower volumes have been a symptom of the sustained rise in interest rates, which in turn increased mortgage rates resulting in affordability becoming more stretched for potential buyers. At the beginning of 2024, there have been encouraging signs that mortgage rates are edging down, which in turn should restore the confidence of home buyers.

Residential planning approvals in Great Britain

Housebuilding: Permanent units completed in Great Britain

Market Overview

The Urban Development market suffered the biggest disruption as a result of COVID. Cities saw a reduction in footfall as people chose to retreat from them and businesses supported homeworking reducing the demand for office space. Nonetheless, we are now seeing a reversal of these practices, with cites becoming more appealing to people again and an array of businesses either encouraging people to return to offices or making it mandatory to return full time.

This is demonstrated as residential rents in 2023 saw a very healthy 8.3% rise according to ONS, supporting continued investor demand for BtR, with volumes remaining resilient at £4.3bn. Demand for prime offices in regional cities with strong ESG credentials has also picked up with rental growth of 5.0% in 2023.

Rental value growth (Dec 2013=100)

Office rental growth