What lies ahead for private real estate investors in 2023?

By Rahul Thakrar, Partner at Boodle Hatfield LLP

Benjamin Franklin is amongst those held to have said that…‘Nothing is certain except death and taxes’. However, in an age of uncertainty with one black swan event after another, a series of additions could be made to this quote.

The prospect and aftermath of economic shocks combined with the factors like the pace of technological advancements, the environmental, social & governance (‘ESG’) concerns and the changing regulatory framework means increasingly, investors are asking difficult questions about the future of their assets, and the real estate market is no exception.

Market volatility & global economic turmoil

If you cast an eye over any newspaper or online news outlet, it is hard not to notice that “recession” is one of the most mentioned words. With banks across the world simultaneously hiking interest rates to temper inflation, experts are forecasting a global recession in 2023. Massive rate hikes will almost certainly put a dent in business growth and investments. As we edge closer to another period of economic turmoil, what does this mean for private capital seeking returns from real estate?

Truly secure investments are hard to come by and while short-term market volatility can be disconcerting, real estate investment requires a long-term outlook. External market pressures have accelerated the termination of the passive property investor but with an innate speed, flexibility and long-term outlook, private capital backed investors are uniquely placed to get on the front foot and will quickly reap the greatest reward. Real estate marches to its own rhythm and by its very nature is known for being solid and steadfast.

Evolving with the market

Whilst for the foreseeable future the market is likely to remain in flux, to maintain value, stakeholders will need to adapt and evolve. With quality assets, backed by robust legal and regulatory certainty, London has always been, and will remain, a unique premier destination, both on a domestic and global level. Private capital investors are likely to flourish here, despite the economic headwinds, if they remain focused on the future and nimble towards new market forces.

Occupiers are now throwing down the gauntlet and demanding more. What were once trends and nice to haves are now essential to doing business. Any investment strategy now requires parties to be positioned to exploit the flight for quality and to have winning principles around flexibility, technology and ESG credentials woven into their DNA.

Whether investors are focused on office space, high end residential, industrial or a new tech asset, the devil is in the detail and this outlook will enable parties, perhaps for the first time, to work together. Those who have the ability to ride the trends, ahead of more cautious institutional investors, will be capitalising on concepts like the emergence of new asset classes within existing models (i.e. car charging points, battery farms, vertiports and vertical farms) and the WeWork ‘hotelification’ model. This will, in turn, attract a significant premium.

Legalisation and requirements

There are a number of increasingly strict requirements surrounding both the bricks and mortar of an asset and its ownership. EPC and MEES requirements and reforms penned as ‘the biggest shake up to property law in a generation’ are likely to create a host of fresh opportunities and challenges.

The introduction of the Economic Crime (Transparency and Enforcement) Act in August 2022 is the latest and is likely to have a significant impact on the property market as we move into 2023 and beyond. The obligation requires overseas companies or entities who currently own or are purchasing UK property to list their details on a public register. The UK Land Registry will not register an overseas entity as the registered owner without evidence that the beneficial owner of the overseas entity is registered at Companies House. Where an overseas entity already owns a qualifying interest in UK real estate, the Land Registry will issue a restriction on the title of the property, meaning it can’t be sold, charged or otherwise dealt with, if the overseas entity has not registered their beneficial ownership at Companies House by 31 January 2023 – which is now only a few weeks away!

So where does that leave us?

As we ride the tail end of the storm and sail into the next, agile private investors must capitalise on their ability to move ahead of slower-moving institutions and make the most of their adaptability in this shifting market. Critically important to this is having professional advisors who are accustomed to working with such investors and understand how they operate. For investors who think long-term and act fast, London remains a city of unparalleled opportunity.