Outlook 2024: Drivers & opportunities

Growth, interest rates and inflation 

The UK narrowly avoided recession in 2023 and on current projections should do so again in 2024, with quarterly GDP growth expected to range between zero and +0.2% during the year. 2024 as a whole is forecast to see growth of just 0.3%-0.4%, contrasting with an average of 1.6% per annum over the previous decade and 2% per annum over the past 30 years.

14 interest rate rises dominated the economic story of the last two years (from just 0.1% to 5.25%), as the Bank of England has put the brakes on economic growth to control soaring inflation. CPI peaked in late 2022 at more than 11% but has now dropped below 5%, and most forecasters expect CPI to fall further to around 2.5% by Q4 2024, close to the Bank of England’s 2% target. However, this will depend on whether wage growth can be contained (it is currently nearly 8%), and on global energy prices remaining stable (geopolitics in the Middle East and Russia, the severity of Europe’s winter weather, and global energy demand all have the potential to cause energy price turmoil).

Nevertheless, we know that energy costs will continue to be higher compared with pre-2022 prices, and whilst this will clearly constrain economic growth and household spending, a positive side effect will be to further encourage the transition towards renewable energy.

Although interest rates will remain elevated throughout 2024, the markets expect the next move in Bank Rate to be down rather than up, which is a positive for investor sentiment. The first downward move is not likely to be until the second half of the year - the Bank of England will not want to cut interest rates too early, risking a reignition of inflation – but this would likely occur earlier if the economy stalls further and enters recessionary territory.

A tight labour market

The UK labour market will continue to cool in 2024, with almost no change to the overall number in employment – contrasting sharply with the average net increase of 300,000 per annum over the last decade (although with huge swings around the pandemic).

The unemployment rate is forecast to edge up by around 0.3% during 2024, but will remain low by historical standards. The labour market will remain tight in many sectors and locations, and this will maintain upward pressure on wages. Whilst this is positive for household finances, it will hamper the fight against inflation, and act a constraint on commercial property occupier demand.

Politics – all change?

2024 will almost certainly be a general election year - it could technically be held as late as 25th January 2025, but autumn 2024 appears the most likely timing. A Labour majority looks almost inevitable, based on opinion polls (the average Labour lead over the Conservatives in polls conducted over the last month is 20 points) and recent by-election results (with three recent by-elections showing a swing of more than 20% to Labour). However, it is worth remembering the quotation that a week is a long time in politics. 

Housing will be a key election issue, as will levelling up (again), and we hope the election will bring greater clarity around the future shape and financing of the planning system. Sustainability policies, too, are much contingent on the election outcome. Labour may well take a very different position to the current government on many issues, potentially strengthening climate targets in contrast to the recent Conservative row-back on climate policies.

Shifting demand, delivering supply

Although 2024 is likely to see muted economic and employment growth at best, property markets will continue to be driven by the changing nature of demand rather than the quantum of it. 

On the retail side, the evolution of online shopping will continue to create huge demand for urban logistics and open storage space in excess of supply. 

Key amongst these drivers is the structural undersupply of housing, senior living and healthcare property, against a population that is both growing and ageing. Indeed, in 2024 alone, projections suggest that the population will rise by approximately 300,000, and that there will be 180,000 more people over the age of 75. Over the next decade, these figures are 1.7 million and 950,000 respectively.

The rural land market is also seeing huge change, as evolving natural capital markets bring an increasing array of purchases to the market, accelerated by the introduction of mandatory Biodiversity Net Gain this year.

These uses will continue to contrast with more uncertain demand for retail and office space and the flight to quality, with commercial property demand focussed ever more tightly on the best located, best quality space. 

For many property markets, the key constraint will be supply rather than demand, ranging from labour shortages in the construction industry, to a lack of the electricity grid capacity needed to service new residential and commercial development, ever increasing data centre demand and the rise of electric road vehicles.

Government policy will be instrumental in alleviating many of these bottlenecks. With attention increasingly turning to the general election, politics rather than economics may well be the key market driver in 2024.

What will the introduction of mandatory biodiversity net gain in January 2024 mean for developers and landowners?

One of the key changes for the planning system in 2024 is the introduction of Biodiversity Net Gain. This requires most new developments in England to be able to demonstrate and deliver a mandatory 10% net gain in biodiversity either on the development site or by purchasing BNG units offsite from third parties in this newly created market. It will ensure that developers leave the environment in a better state than they found it by creating or enhancing habitats for wildlife. It comes into effect from January 2024 (or April 2024 for small sites) having been delayed from Autumn 2023.

We expect BNG to have a significant impact on the development process in the UK, with increased focus on green infrastructure and more innovative design solutions. It will also transform the relationship between developers and landowners, who will enter BNG agreements for mutual benefit.

In our outlook for 2023, we anticipated a period of continuity, with the government having just committed to delivering key rail schemes including HS2 phase 2 to Manchester. The cancellation of the Manchester HS2 leg has been damaging for the UK’s global image and for long-term strategic infrastructure delivery. 

On the positive side, the funding has been reallocated to ‘Network North’, a vision to “deliver faster and more reliable journeys between, and within, the cities and towns of the North and Midlands”. Improving transport connectivity between key economic centres outside of London and the South East is indeed a vital tool to ‘level up’ the UK. Whilst we welcome the ‘Network North’ vision, there is little confirmed detail on the specific schemes that will be delivered, or timescales. This will need to be a priority for 2024.

It is also very positive that proposals for Northern Powerhouse Rail (NPR) are continuing to be developed. The aim of this much-needed scheme is to transform connectivity between Liverpool, Manchester, Leeds, York, Newcastle, Sheffield and Hull, incorporating both new line and upgrades. The Transpennine Route Upgrade is now being delivered as phase one of NPR, electrifying and upgrading the line between Manchester and York. Carter Jonas is currently instructed on this major infrastructure scheme, delivering land assembly, consenting, and land referencing services.

The establishment of Great British Railways (a new public body to own, run and plan the rail network) was included in November’s King’s Speech, but the necessary legislation for reform is unlikely to be passed before the general election, effectively ‘kicking the can down the road’ again.

Although transport schemes tend to grab the headlines, other infrastructure projects are also vital and are arguably increasing in importance. Upgrading the capacity of the National Grid is becoming a critical issue, given the sheer amount of additional power that will be needed over the next decade to electrify building heating systems and road transport, plus cope with population growth, housing development, rising data centre demand, and more. 

The National Grid projects that demand for electricity will increase by 50% in the period to 2035. At the same time, electricity generation will need to be decarbonised if the UK is to meet its ambitious climate targets. The National Grid and the Distribution Network Operators are planning significant investment and we should see this coming through from mid-2024.

Similarly, the water industry faces the challenges of catering for additional demand, planning for the impacts of climate change, and reducing water and sewage leaks. 2024 will see a further gearing up of investment to deal with these challenges.

The year ahead cannot be ‘more of the same’. Significant investment will be required to deliver the infrastructure the UK needs, creating opportunities across the infrastructure spectrum. Indeed, residential and commercial development in certain key locations is already being held back by the challenges of obtaining sufficient power and water. But infrastructure investment is a long-term proposition, not suited to political cycles of five years (at most), and current initiatives will be either underpinned or undermined by the outcome of the General Election. We hope 2024 will be a year for bold decisions.

With 2024 almost certain to be an election year, what policies for housing delivery are we likely to see discussed and implemented?

The delivery of new housing has stalled. The government’s target to build 300,000 homes per annum in England was downgraded to ‘advisory’ status in 2022, and whilst it is still the stated aim to achieve this figure, no timescale is attached. Meanwhile, fewer than 200,000 net additional homes per annum were actually delivered over the last decade, meaning that year on year the deficit in delivery is growing.

It is likely that both main political parties will maintain a focus on achieving the 300,000 per annum figure in their manifestos. Indeed, Labour have confirmed they will reinstate this figure as a mandatory target, in addition to updating planning laws to give local authorities a greater say in delivery.

The big debate looks likely to be around land value capture (a mechanism by which a greater proportion of the uplift in land value arising from planning consent can be captured for public benefit such as infrastructure and affordable housing). 

Labour leader Sir Kier Starmer has referenced an ambition to build 1.5 million homes through a new generation of new towns. This is a highly ambitious strategy, and the mere fact that is it being advocated acknowledges the radical step-change that will be required to raise housing delivery to a rate anywhere near the target.

Under the Labour proposals, the development of new towns would be achieved through development corporations with CPO powers to capture the land value, so that the infrastructure has a better chance of being funded. There is some logic to this approach. It is likely to prove divisive for landowners, but we foresee that there will end up being a degree of compromise involving some sharing of the uplift in value. Indeed, if we are going to develop at scale, then some form of land value capture is probably almost inevitable.

The debate around building major new settlements also raises the question of the green belt. Although the previous target of building 60% of all new homes on brownfield land has been removed, the ambition lives on in the NPPF (2023), and it has undoubtedly slowed the rate of housing delivery.

Brownfield housing development is not always viable and policy needs to reflect this reality. It is positive that Labour has recognised the potential of the low-quality, mostly brownfield, ‘grey belt’ that is unnecessarily protected through green belt allocation. In any case, there is nowhere near sufficient brownfield land to meet the 300,000 figure, certainly across multiple years, and meaningful greenfield development will be integral to increasing the rate of delivery.

Demand for homes will continue to be impacted by a fall in mortgage availability and affordability, exacerbated by the ending of the Help To Buy scheme for first-time buyers, with housebuilders also feeling the ongoing effects of labour shortages and elevated build cost inflation. Accelerating the rate of housebuilding will not be easy for whoever wins the election, and 2024 looks set to be a challenging year for housebuilders against the continuing subdued economic outlook.

Commercial sector

As 2024 dawns, the UK commercial real estate sector remains an area of keen interest for investors. The sector, however, has not been immune to economic turbulence, facing its own unique set of challenges and opportunities. 

A number of recent developments, including the pandemic, the war in Ukraine, and rising inflation, have raised concerns about the sector's future prospects. Despite these challenges, the UK real estate industry remains relatively resilient. The country's strong economic fundamentals, including a growing population and a thriving economy, continue to underpin demand for real estate assets.

The UK commercial property market has felt the impact of higher interest rates, with a significant tightening of monetary policy resulting in a steep decline in buyer activity and valuations. 

Despite these challenges, there are signs of stabilisation. On the occupier side, demand from tenants, especially in the industrial market, continues to be robust, indicating a divergence between investor and tenant market dynamics, while in the office sector the shift in occupier preferences towards “flight-to-quality” will likely support demand for the best office space in the market. 

Certain sectors within the commercial real estate sector may offer more promising investment opportunities. Alternative sectors such as data centres, aged care facilities, student housing, life sciences, and BTR are expected to see strong rental growth, providing potentially safer investment options compared to traditional commercial spaces. 

The broader economic outlook, including stagnant growth and high inflation, will play a critical role in shaping the commercial real estate market in 2024. Employment trends, which have so far supported tenant demand, might shift, with a forecasted rise in unemployment potentially leading to weakened demand for commercial premises and increased vacancy rates.

Investors seeking opportunities in the UK commercial real estate market should approach with a strategy that is both cautious and well-informed, focusing on sectors that align with emerging economic and societal trends.

Residential sector

International investors are drawn to the UK for a number of reasons, but largely buoyed by the fundamental undersupply of rental accommodation across the UK. This shows no sign of abatement, even in the long-term forecasts. Current government policy has driven individual landlords away from the private rented sector in record numbers, and supply of new rented accommodation falls far short of government targets year after year. When taken in tandem with the recent population increases due to net migration, the underlying drivers of rental demand will remain strong for the foreseeable future, regardless of which party leads the current or near-future government.

Investors noting strong annual rental growth rates, barriers to entry for first-time buyers, and the desire for the majority of the population to live in a house rather than a flat will see Single-Family Housing as a still-untapped market to be exploited. The current overall market conditions and position of housebuilders with large pipelines and poor sales forecasts also sees the climate ripe for deals that can introduce build to rent capital to ease some of these housebuilder concerns. 

The prevailing drivers of housing need, rental sector demand and population growth will continue to present a welcoming picture for build to rent investment for many years to come.