The commercial real estate sector in Britain is experiencing contrasting performance across offices, warehousing, industrials, logistics and retail. Persistent high demand for ecommerce has resulted in an increase in warehousing take up and rents. The resilience of the office sector is being put to the test as a first wave of long term contract and lease renewals are negotiated, whilst greater commitment achieving ‘Net Zero’ emissions is reshaping premises viability.
The UK has the highest e-commerce penetration rate in Europe, according to a recent Savills report. Such is the depth of demand relative to low supply of warehousing stock that, despite both rents and costs rising precipitously, vacancy rates for prime space remain below 3 per cent. The London warehousing market is the most expensive globally at $35 per sq ft. with costs having risen 8.4 per cent on average annually through to June 2022.
Meanwhile, interest rate hikes are driving debt-based investor strategies as non-banking lenders are hedging against market volatility risks. Investors are eschewing equity-based upside in favour of cash returns in service of downside protection. The latest JLL investor sentiment barometer indicates that 21 per cent of investors plan to pursue debt focused capital deployment incorporating flexible accommodations for borrowers outside institutional remits.
For the office sector, this is likely to constrain commercial real estate investment, which a recent report by Revolution Brokers indicates, grew by a near record 40 per cent between 2020 and 2021. Research from BNP Paribas UK reveals UK office transaction volumes reduced 32 per cent annually in the second quarter of 2022 with £12.1bn in activity. Central London was anomalous with the most investment over the first half of 2022 ever at £10.3bn.
A key force shaping demand for commercial real estate is Net Zero carbon efficiency. Data from Boodle Hatfield, a private wealth law firm, shows that 82 per cent of FTSE 100 (up from 60 per cent last year) companies are committed to achieving Net Zero carbon efficiency up to 6 years ahead of the UK government’s 2050 goal. This impetus is accelerating adoption of higher rental and higher occupancy low carbon commercial properties.
“Last year, just shy of £50bn was invested into the commercial sector, with the revival of a pandemic-stricken London market driving this activity with £21.2bn worth of investment alone. This equated to a 40% increase in commercial real estate investment when compared to 2020, with an average of £4.162bn invested every month.”
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