Over the last three years my working theory for the investment market has been that confidence (and ultimately trading volumes) would recover once the Base Rate had started to fall.  With the first cut in the UK base rate now almost two months behind us, there are definitely signs that confidence is improving but not much evidence of a recovery in deal-making.

While the Q3 2024 data is not fully counted yet, it is clear that the first nine months of 2024 will have been more active than the same period last year at an all-sector level. However, some segments and regions are still looking subdued, and in some parts of the market 2024 is likely to be one of the worst years for investment activity in recent memory. So, what is holding investment activity back, and is the autumnal pick-up in confidence more noise than signal?

CONFIDENCE IS BACK

Starting with the question of confidence, there is no doubt that conversations I am having with investors sound more optimistic about the future, more optimistic about the UK as an investment destination, and more optimistic that some values are poised for recovery. Some of this confidence comes from data, such as the fact that the MSCI total return for office, retail and industrial went positive in August for the first time in over two years. Some comes from comparison, in essence that we look more stable than some other markets where investors might have placed money, and some just comes from the fear of missing out on the traditional rapid recovery in values that has always taken place in the UK after a shock.

OPTIMISM IS GROUNDED IN REALITY

Any recovery in optimism should always be measured against some in the industry’s tendency to amplify one green shoot into a small meadow, and it is worth noting that the CBI business confidence index swung back into mild negativity in Q3, following its first foray for a long time into positivity in Q2.

So, are the optimists wrong? They may be if they imagined that one base rate cut would be enough to move the market, particularly if that market is one where prime yields are still lower than the all-in cost of borrowing. However, the overall reasons to be more confident about the future are grounded and rational. Property performance is intrinsically linked with economic growth, and there is no doubt that this is improving and expected to continue to do so. Inflation is broadly under control, and this will feed through to a slow but steady fall in the cost of borrowing.

RECOVERY WILL COME AT DIFFERENT SPEEDS

I remain of the view that sectors where investors think that values have over-corrected (or risk is overstated) will recover first, along with those where there is some kind of structural story behind the occupational market. This could be about online shopping favouring logistics and data centres, or high housing costs favouring build to rent.

The challenge for the remainder of 2024 will be whether we see enough assets that tick these sort of boxes being brought to the market. If vendors choose to sit on their hands until some kind of turning point has been more clearly signalled, we may have to wait until 2025 to see transactional volumes  tick up markedly.

Further information

Contact Mat Oakley

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