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Investors go cool on UK property market

31 Oct 23 The UK construction industry has been dealt a warning today that real estate investors are pulling in their horns and looking to other countries to invest their money.

Two-thirds of institutional real estate investors are reconsidering their UK ventures due to market conditions, according to research by insurance broker Gallagher.

Gallaher found that 64% of UK real estate investors are considering shifting their investment abroad;  44% have pulled investments, while 21% have had to repurpose developments (mostly switching from commercial to residential).

The study of 300 UK institutional real estate investors responsible for their company’s asset management strategy found a number of factors – including changing working patterns, interest rate rises and inflationary pressures – were threatening their investments. Most (86%) said projects in which they had invested had experienced significant disruption in the last five years, with 37% of investors saying they believed the level of risk in investing in the UK cities had increased since the pandemic.

Among the factors causing disruption, the most common answer was supply chain issues (41%), 19% cited a change in city centre working patterns and 29% said a fall in demand for city developments in the UK had caused the disruption. Many are having to review their investment and plans for projects even before construction has been completed.

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According to Gallagher, its survey raises concerns about the viability and growing risk, with 34% saying their investments stood to make a loss and 45% saying they will not achieve the returns previously expected.

The survey revealed that 44% of investors consider UK property to be no longer profitable enough. This lack of demand is exacerbated by the UK’s empty property problem with more than 650,000 buildings (according to Leeds Building Society) currently unoccupied.

Gallagher director Dominic Lion said: “Real estate disruption clearly poses a severe threat to the future of investment in UK cities, with key institutional investors facing greater risk. Ongoing delays, changing working patterns and rising interest rates are making it difficult for investors and developers to see a tangible reward on current projects, making the UK less attractive for future investment and investors risk profiles changing more regularly.

“A shift in working habits – from office to hybrid – following the Covid-19 pandemic is evidently decreasing demand for commercial development in UK cities, as projects begin repurposing sites from commercial to residential. This trend is actively impacting returns for firms, and driving a significant shift in investments moving overseas.”

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