Home Property How will the UK energy crisis impact property markets?

How will the UK energy crisis impact property markets?

by LLP Finance Reporter
12th Sep 22 3:51 pm

Workers could offset some of their energy bills by spending more time in the office, although that would add to other expenses such as commuting and childcare which for many would exceed the energy saving.

Perhaps more significantly, however, with the economy slowing as a result of the crisis, concern over job security is likely to encourage more people to ensure they are visibly “at work” in the office.

The prospect of embattled consumers and rising business costs bodes poorly for consumer-facing real estate, such as retail, hospitality and leisure. These subsectors face a third tough winter in a row after the difficult trading conditions caused by the pandemic.

For these consumer-facing real estate sub-sectors, we would expect to see rising levels of tenant insolvencies, and pressure on landlords to renegotiate rents. Performance will probably be stronger for discount retailers.

The industrial sector faces some contradictory forces as a result of the energy crisis. Manufacturing firms will face large power bills, causing them to look to reduce costs elsewhere, which could make them rent sensitive. On the other hand, consumers may be more inclined to seek bargain prices online, thus supporting demand for distribution warehouses.

The government has hinted that in the event of blackouts commercial districts will be a lower priority than residential areas, pushing power resilience from backup generators and other forms of self-generation including solar, wind and heat pumps, up the property agenda.

Another issue for property arising from today’s announcement is the impact on exchange rates. The pound has been under pressure against the US dollar and other major currencies this year, and this additional government borrowing could prompt the currency market to reassess the value of Sterling. Historically a weak pound has encouraged foreign investors to target UK real estate and could do so again provided they have confidence that the currency will bounce back in the years ahead.

Forecasters expect inflation to quickly decline from spring 2023 onwards, but landlords and tenants have to make it through a difficult winter first.

The hit to economic growth alone will have negative implications for property demand. However, the crisis is a compelling reason for landlords to aim to meet upcoming ESG deadlines early, a move that will reduce costs, and retain tenants and future-proof assets – thus delivering long-term benefits to income and capital values.

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