Overview
McDermott’s London Real Estate Group co-hosted a roundtable with Knight Frank at our offices in November 2024, titled “Survive or Thrive in 2025”. With market sentiment dominated by this mantra, we wanted to discuss together with key industry figures what their expectations for the year ahead across key asset classes.
Key takeaways were that the European Real Estate market is still fragile, not having completely recovered from 2021, but deals are happening with the amount of dry powder available to be deployed into Real Estate strategies. With interest rates seemingly peaked and key elections concluded, the appetite to deploy such capital will increase and lead to increased transaction volumes. We then looked at key asset classes to assess whether they will benefit from the general increase in investor confidence.
In Depth
Offices: 2 distinct markets driven by the continued importance of ESG:
- Prime Offices: To satisfy occupier demand, which is currently outstripping supply, investors and developers face challenges to ensure their buildings meet ESG demands and achieve the valuation premium as prime offices. Future proofing against likely legislative change, occupier demand and technological change is challenging so a premium will be placed on flexible energy efficient and amenity rich buildings.
- Brown to Green: Older office assets have not historically had the required focus on ESG requirements which have been overlooked in office buildings. With these standards now critical for long-term viability, due to a combination of the gap between seller and buyer pricing aspirations for such assets narrowing and sustained rental growth for “best in class” offices expected in 2025, numerous funds focused on acquiring older office buildings and deploying the substantial capex required to reposition such buildings as prime offices. As the momentum towards return to work continues, these strategies are likely to increase in popularity with the return profile appreciating.
Operational Real Estate: Remains “hot” however:
- Data Centres: Energy supplies to data centres is a major factor. Whilst land may be available, the required power supply to these plots is proving an issue (as well as the source of this energy) and the competition for energy from housing (as a key governmental priority), therefore repurposing of existing logistics buildings with certainty of energy supply is likely to increase.
- Student Accommodation: Possibly an over-saturated market, with reduced student numbers following Covid and affordability issues influencing occupier demand for the premium rental levels sought from PBSA. This may shift investor appetite to other European markets where supply is more constrained.
- Living: Cladding and the implications of the Building Safety Act 2022 remain defining factors for development, the risk/cost of which remains unquantifiable as it is unknown what actions will be taken against developers as no litigation has gone through the court system as yet.
- Industrial: demand remains high, with October and November 2024 the busiest period in the sector in the last four years. The certainty of the Labour government coming into power in the UK provided some stability for investors.
Now that we are a month and a half into 2025 with MIPIM around the corner, it seems as though the new mantra of “Strive in 2025” will evolve as the new mantra for 2025 i.e., whilst we are still waiting for those big deals to kick off, with investor confidence increasing, transaction volumes are likely to be well ahead of 2024 and 2023.
What to Look Out for in the Year Ahead – McDermott’s Predictions:
- A move away from the larger players, as new capital sources are being seen in the market as legitimate potential buyers.
- Buyers and occupiers are willing to wait and pay more for energy efficient buildings.
- A drop in interest rates (together with the weakness of the pound) will provide developers and investors with the push needed to invest.
- Inbound investment from family offices and sovereign wealth likely to increase.
- Pricing gap between seller and buyer narrowing and triggering interest in older office stock for brown to green strategies.
- Rental growth continuing for Prime Offices, leading to further yield compression.
- Data centres to remain a “hot” asset with a continued appetite for logistics (urban logistics through to big box).
- Return of “best in class” traditional retail (retail parks and shopping centres).
- A continuation of the merger between real estate and infrastructure as an asset class into “real assets” with investors merging teams and buckets of capital under that banner.
- The continued march of alternative lenders in the space who will replace conventional lenders who are retrenching from direct lending.
We are looking forward to MIPIM and discussing these themes with attendees. Please do reach out if you would be interested to meet with the McDermott team, whose knowledge in the real estate sector is pan-European.