What recession means for property

According to the latest data from the Office for National Statistics (ONS) the UK economy fell into a recession at the end of 2023, as gross domestic product (GDP) for October to December dropped to 0.3%, a sharper decline than economists were expecting, and the second quarterly fall in a row, after a decrease of 0.1% in the previous quarter, between July and September 2023.

As a recession is defined by two quarters of negative growth the UK is now technically in recession, due to higher inflation and high interest rates. This has had a significant impact on consumers' spending, however, all major sectors contracted during the period.

Across the whole year, in 2023 GDP was estimated to have increased by 0.1% compared with 2022, while on a monthly basis, Britain ended the year with a 0.1% decline in December.

So what does this mean for property in the UK?

A recession like the one we are seeing at the moment has already affected the real estate sector in a number of different ways. Here are some of the impacts we have seen over the last 6 months and expect to continue to see as the market continue to stagnate in certain areas.

Decline in Property Prices: Due to high interest rates we have seen a significant reduction in demand for property. This has led to a decline in property prices in some areas and sectors, where purchasers see more inherent risk or struggle with affordability. In commercial real estate offices have seen yields move out due to a lack of occupier demand and costs associated with ESG upgrades to meet MEES regulations and in the residential market, million pound plus properties have struggled to sell across the north except in key location hot spots due to affordability issues. Core assets in strong locations, such as last mile logistics, continue to hold their value as demand still outstrips supply.

There are definitely less purchasers in the market for the majority of assets and for more difficult asset this often means more time on the market which for vendors often means downward pressure on prices.

Reduced Transaction Volumes: Economic downturns typically result in reduced transaction volumes as buyers and sellers adopt a cautious approach amid uncertain economic conditions. This can lead to a slowdown in property sales and leasing activity across various segments of the market.

We have certainly seen a stagnation across real estate market in the second half of 2023 and into 2024. Prime markets are now beginning to see some positive signs but value-add assets are still seeing a pricing disparity between vendors and purchasers, mainly due to difference in opinion in appraisals over the cost of upgrading the assets.

Rental Market Softening: In a recession, tenants may face financial constraints, leading to increased vacancies, downward pressure on rents, and higher tenant turnover rates. As such we are seeing landlords offering improved incentives, these don’t appear to be on rent reductions, as we continue to see headline rental growth, but we are seeing increased incentive periods as part of new leases and lease extensions, or landlord improvements to retain tenants and maintain occupancy levels.

As a landlord now more than ever it’s key to get your asset management strategy right to maintain occupancy, retain tenants and limit rental leakage.

Increased Insolvencies & Downsizing: Commercial real estate sectors, including office, retail, and hospitality, are particularly sensitive to economic fluctuations. During a recession, businesses may downsize, consolidate operations, or go out of business, leading to higher vacancy rates and reduced demand for commercial space. This can result in declining rental income and property values for commercial property owners, so it’s important to have a good relationship with your tenants so that you understand their current business position giving you options on whether to offer rent reductions to try and retain the tenant or to get ready to market the property should the tenant fall into administration.

The total number of UK company insolvencies for 2023 was 30,199, a 12% increase compared to the same period in 2022 and a 52% increase compared to 2021. The increase was predominantly from liquidations, which tend to be requested by smaller companies, but administrations were also approaching pre-pandemic levels after a period in which companies were given more leeway on some debts.

Mortgage/Funding Market Constraints: Tighter lending conditions and reduced access to credit during a recession can make it more challenging for prospective buyers to secure funding. This can further dampen demand for property and contribute to downward pressure on prices. We have seen this clearly in the residential markets, although the cost of mortgages has come down, banks are still risk adverse limiting access to mortgages.

We have also seen this in the development funding that has significantly decreased for all but the best development opportunities. Whilst this will create short term downward pressure on prices, it will also limit future supply and should act as a catalyst for investment for any investors with access to cash or favourable funding arrangements.

Government Intervention and Stimulus Measures: During a recession, governments may implement fiscal and monetary stimulus measures to support economic recovery. These measures could include initiatives to boost infrastructure spending, provide financial assistance to businesses and individuals, and stimulate housing market activity through incentives such as tax breaks, grants, or subsidies.

With a election expected in Q4 of this year we expect the tory party to provide tax cuts in the chancellors budget in a final attempt to reverse what the polls are suggesting will be a labour win.

Regional Variations: As we mentioned briefly above the impact of a recession on the property market can vary depending on regional economic conditions, local supply-demand dynamics, and sector-specific factors. Some regions or market segments may be more resilient than others, depending on factors such as employment growth, industry diversification, and housing affordability.

Overall, a UK recession can lead to challenges and uncertainties in the property market, including declining property prices, reduced transaction volumes, softer rental markets, and tighter lending conditions. ID Real Estate don’t expect to see a significant downturn in the market however as this recession appears to be providing a longer period of stagnation rather than a crash like we saw in 2008. Recessions do provide opportunities for investors, as we touched on above, the fall in development will see a medium to long term supply shortage especially across industrial and residential.

For more information on investing and the current market check out our Quarterly Market Update or get in touch with Jonathan at jonathan@idrealestate.co.uk.