Softening UK commercial sector yields investment opportunity

Created: 02 Feb 2023

After a blistering year in 2021 the commercial property sector in the UK has now softened. This yields investment opportunities, with a continued flight to quality being a key driver of activity across all asset classes. In the near term, a moderate recession is anticipated, with high inflation and rising interest rates putting downward pressure on economic activity. However, income returns, rather than capital growth, will likely underpin commercial property investment in 2023.

Capital values that rose 13.8 per cent in 2021, alongside returns of 19.9 per cent, have capitulated, faced with the recent months of high interest rates and economic instability. As a result 2022 capital values fell 13.3 per cent in 2022, with returns also down 9.1 per cent according to the latest CBRE index.

Overseas investors are taking advantage, having already invested a huge stake in London’s tall buildings, and last year the US topped the charts for London commercial property investment, putting in around £4.6bn. Savills data shows this was followed by Singapore at £2.4bn and South Korea at £1.6bn. A total of over £13bn of overseas investment went into London commercial property, which is set to continue with greater discounts now available.

Further, in Scotland, the commercial property sector saw £2.39bn traded in 2022, marking a 12.6 per cent uptick relative to the five-year average. Offices and retail warehousing were the strongest performers by sector over the course of the year. Analysts expect further capital deployments given the degressive impacts of an inflationary environment on cash balances and deposits.

Whilst the UK commercial property sector may be softening, investment opportunities abound given the market is expected to stabilize in 2023, with income returns, rather than capital growth, set to underpin commercial property investment. Sectors like offices, retail warehousing, and sustainable properties are expected to remain attractive to investors. Investors are also looking for best-in-class assets across the sectors.

Rents are forecast to decrease, but only by 0.6% on average, with 39.1% of respondents forecasting they will remain flat in Q1 2023. Respondents commented that the growth of the sector will vary dramatically depending on the location and size of the units. London is expected to stay positive, but will see a much slower growth trajectory. However, big box logistics and sheds nationwide will see lower demand, alongside lower supply, so rents will at least hold.

https://propertyindustryeye.com/commercial-property-market-values-set-to-fall-sharply/

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