By Richard Anthony, JFA Committee Member and Head of Aztec’s Jersey Real Assets Team

UK real estate has long been an attractive sector for global investors – but for various reasons, it is currently not without its challenges.

It is also a sector where Jersey firms have considerable experience, with members of the Jersey Funds Association being fortunate enough to work with some of the top real estate fund and asset managers globally and specifically in the UK.

This piece provides a snapshot of the key issues currently facing the real estate sector, through the lens of our clients and investors.  

The Rise of Inflation

UK inflation has continued to rise sharply in recent months, with 2022 seeing the highest rate reached in over 40 years. As central banks aim to control inflationary pressures, interest rates have also risen in dramatic fashion.

This has undoubtedly influenced investor sentiment towards UK investment, the ability to generate attractive returns on existing portfolios and to secure financing for new projects, not to mention the impact on valuations. Speaking of which…

Uncertainty Surrounding Valuations

Asset valuations in UK real estate have become increasingly uncertain and downward adjusted in various sub-sectors, particularly in the commercial real estate sector - with various factors contributing to this challenge.  

As a result, deal flow has been impacted, with potential sellers not wishing to sell and potential buyers considering whether we are really at the floor of the market, keeping their capital dry or attempting a cheeky chip on price while at the heart of a transaction.  

On the upside, various asset and fund managers are hopeful for a bounce in the final quarter of 2023 and moving into the start of 2024, with fingers crossed for the plateau and descent of interest rates, which will bolster market sentiment.

Ability to Raise and Retain Capital

Fund managers in the UK real estate sector face the ongoing challenge of raising capital for their funds.

With increasing competition and changing market dynamics, attracting investors and securing commitments can be a daunting task. Investors are becoming more discerning, seeking transparency, track records and granular level due diligence.

Additionally, many open or quasi open-ended funds are having to work hard to maintain liquidity, as certain investors look to re-allocate or withdraw capital from the sector.  

In the current environment, fund managers must demonstrate their ability to deliver attractive risk-adjusted returns and navigate market uncertainties to gain the confidence of potential investors.

ESG Impact

In recent years, there has been a growing emphasis on environmental sustainability and energy efficiency in the real estate industry.

Buyers and sellers are increasingly considering Energy Performance Certificates (EPC) and BREEAM ratings when evaluating commercial buildings. This "flight to quality" trend means that buildings with higher ratings are more likely to attract buyers and command higher prices.

On the flip side, other buildings with lesser ratings are becoming harder to sell, forcing the need to either make further capital investment, or exit at less attractive valuations.

Jersey’s Role

Whilst the above challenges are undoubtedly shaping the UK real estate industry at present, and may persist for some time, members of the JFA continue to actively facilitate high quality capital flows into the sector through Jersey domiciled structures.

Why? The Island has a vast pool of industry leading legal and professional firms with talented real estate professionals. The legislation, regulation and taxation applicable to investment structuring is finely tuned, incredibly robust and sufficiently flexible to meet the needs of most investors.  

If you are considering an investment in real estate through a fund or corporate structure, consider Jersey.