The UK’s commercial real estate landscape is poised for significant changes in 2024, according to Landsec, one of the UK’s largest property landlords.
Landsec, with a £10bn property portfolio that spans shopping centres, urban developments, and London offices, reported a 3.6% decline in the value of its assets in the six months leading up to September. This decline is primarily attributed to rising interest rates affecting the property market.
Future Opportunities in Commercial Real Estate
Despite the current downturn, Landsec predicts a stabilisation of prices for high-quality properties in the upcoming year. This stabilisation, stemming from interest rates settling at higher levels, is expected to reignite property investment in 2024. This period, though challenging due to increased borrowing costs and uncertainties about office demand, presents a unique opportunity for savvy investors.
Strategic Moves by Landsec
Capitalising on the Market Dynamics
Landsec’s strategic approach in this changing market included selling £1.4bn of property at higher prices last year. This decision positions the company to take advantage of emerging opportunities as the market adjusts to the new economic realities.
Focus on Prime Locations
The sales primarily involved large office buildings in the City of London, where the value of Landsec’s remaining buildings fell by just over 9%. With a significant part of the vacant office space concentrated in just 1% of London’s buildings, predominantly in the City or Docklands area, Landsec is targeting these prime locations for future investments.
The Shift in Office Space Demand
The Impact of Remote Work
A notable trend impacting the commercial property market is the shift towards remote work. Landsec’s CEO Mark Allan highlighted that large corporate headquarters are most vulnerable to this shift. This change in demand dynamics is crucial for investors to consider when evaluating potential commercial property investments.
The London Office Market: A Closer Look
Occupancy Trends
Landsec’s analysis reveals a clear divide in the London office market. While over 80% of London buildings are fully occupied, the majority of the vacant office space is concentrated in a small fraction of buildings. This indicates a polarisation in the market, with certain locations remaining highly sought after.
Worker Presence in Landsec Offices
In Landsec’s London offices, there has been a 22% increase in worker presence compared to the previous year. This trend suggests a gradual return to office work, which could impact the demand for office spaces in the city.
The Retail Property Sector: Turning a Corner
Rising Retail Rents
After six years of declining retail rents due to competition from ecommerce, Landsec has observed a 2% increase in rents agreed with existing tenants. This signals a potential rebound in the retail property sector, making it an area of interest for investors.
Looking Ahead: 2024 and Beyond
Stabilisation and Decline
While prices for in-demand properties are expected to stabilise, Landsec forecasts a continued decline in the value of “secondary assets” – properties with questionable cash flow sustainability. This distinction is crucial for investors when considering risk and return.
Market Stability
Finally, the risk of “disorderly sales” disrupting the market is considered low by Landsec. The presence of new equity and mezzanine finance is expected to provide sufficient stability in the capital structure of the property market.