The UK commercial real estate market is displaying a fascinating dichotomy. While certain sectors face challenges, others are thriving and show promising prospects. If you’re considering investing in commercial property, understanding these trends can help you make informed decisions.
Dwindling Institutional Investments
The commercial property landscape across Europe, and specifically in the UK, is undergoing significant changes. MSCI’s Q3 data highlights a concerning trend: European commercial property transaction volumes have dropped for the sixth consecutive quarter, hitting a 13-year low. With limited ‘pending deals’ on the horizon, expectations for Q4 don’t seem promising either.
The UK’s performance is slightly ahead of its European counterparts but still displays a significant drop. When compared to the previous year, UK deal volumes are down by a whopping 49%, whereas Europe has witnessed a decline of 54%.
The London Office Conundrum
The London office space is particularly feeling the pinch, with a wide chasm between what sellers expect and what buyers are willing to offer. Buyers, on average, are looking to secure properties at prices 28% lower than sellers’ asking prices. This disparity is even more significant than that witnessed during the 2009 global financial crisis.
The main culprits? High interest rates and uncertainties surrounding the long-term demand for office spaces in a post-pandemic world where hybrid working is becoming the norm. MSCI projects office asset values might need to drop another 13 to 15% to revive market liquidity.
Retail assets aren’t faring much better, with a pricing mismatch of around 23%, emphasizing the sector’s continued struggle with the rising prominence of online shopping.
Beds and Sheds: The Silver Lining
While the narrative might seem gloomy for offices and retail spaces, it’s an entirely different story for warehouses (affectionately termed ‘sheds’ in the industry) and residential properties.
The Resilience of Warehouses
Online shopping, which saw a significant boom during the pandemic, has underscored the importance of warehouses. Though their value dipped post the boom, the consistent demand from businesses, coupled with attractive pricing, has reignited investor interest.
MSCI’s data reaffirms this trend, noting that the UK’s industrial market is among the few segments with a deal volume higher than the pre-pandemic average. Warehouse values, after an initial dip, have shown consistent growth for seven months straight.
The Build-to-Rent Boom
The build-to-rent (BTR) market is making waves despite the overall slump in house prices. High interest rates may be deterring potential homebuyers, but they’re drawing institutional investors towards BTR. The rising rent prices serve as a significant attraction.
Even though investment volumes have dropped from their peak last year, they still maintain an impressive level above the long-term average. Agency Knight Frank paints a bright future for the sector, projecting its value to skyrocket from £71bn in 2023 to an astounding £128bn by 2028.
Should these predictions hold, it spells excellent news for significant players in the sector, like Grainger (GRI), and offers a much-needed boost for the commercial property sector.
In Conclusion
The UK’s commercial property landscape is a mixed bag. While challenges are evident in office and retail sectors, the prospects of warehouses and the BTR market offer a glimmer of hope.