More than 170 members assembled at M&G’s offices last week to hear and question the views of an expert panel on the prospects for the year ahead.
Torn. Outraged-optimism. Confused.
This might sound like a geolocation from the popular app what3words.
But these were also the immediate responses from three of our expert panellists when asked, by moderator Ann Xu, to encapsulate their feelings about markets in a word.
Torn, because 2023 is likely to offer the contrasts of a challenging first half, followed by captious optimism.
Outraged-optimism, because of the now almost pervasive impacts of the climate crisis and socio-political unrest, and optimist for action with pressure from government and clients to reach net-zero carbon.
Confused because, well, what is anyone to make of markets that display optimism on rates and inflation, while central banks are essentially trying to generate a recession?
When asked to elaborate, and share more detailed thoughts on what the year ahead might hold, panellists arrived at a number of familiar points.
Samuel Tombs, from Pantheon Macroeconomics, made a compelling case for a recession – as mortgage refinancing, the UK’s remarkably high levels of short-term debt, and the state energy subsidies all collide in late winter / early spring. But this is tempered by a modest recovery into positive growth territory by the end of the calendar year.
M&G Real Estate’s Emma Grew believes that the living sector will make for interesting viewing: “It’s grown almost exponentially but that hasn’t yet been fully reflected in pricing, which is interesting. Living is also now much more diverse, with family, single and student sub sectors – and the lack of supply in the latter, as well as build-to-rent, makes them ones to watch.”
Simon Durkin, at BlackRock, emphasised the lack of clarity and direction from markets. He added: “The capital decline was the most rapid and aggressive of any of the last four market cycles I’ve witnessed.”
But he also questioned the future demand profile for London offices. Clearly tenants are increasingly cognisant of the product they offer their employers – who want time in the office to be as productive and fulfilling as possible. But, with average EPC ratings so low, and the necessity of expensive refurbishment and retrofitting, might we see market participants start to reappraise the idea of the traditional office?
Knight Frank Investment Management’s Chantal Beaudoin agreed that buildings need to electrify and tackle embodied carbon – but also pointed out that, “the impact of physical climate risks is likely to be far more significant and lasting than any refurbishment requirements cost" on members’ portfolio holdings. Investing in reducing carbon and in climate mitigation strategies must go hand-in-hand.
Audience participants witnessed a lively and insightful discussion – posing questions about life sciences, “something that will require collaboration with government,” in the words of Grew) but not about rent or yields.
And the omission of those two perennial topics of conversation was something AREF’s managing director picked up on in his closing comments. He also emphasised the Association’s work on the thorny issue of DC funds and platforms, and provided an update on engagement across the industry with the Labour front bench, as the latter focuses on levelling up, climate and housing.
Thank you to all of our expert participants:
- Moderator: Ann Xu, Portfolio Manager at CBRE Investment Management
- Keynote & panellist: Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics
- Panellist: Chantal Beaudoin, Partner, Head of ESG at Knight Frank Investment Management
- Panellist: Simon Durkin, Head of European Real Assets Research at BlackRock
- Panellist: Emma Grew, Head of UK Research, M&G Real Estate
A recording of the event is available to AREF members only here.
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