UK Prime Place For Commercial Property Investment

Following significant setbacks in the residential market in 2023, the UK is poised to reaffirm its position as the world’s premier destination for commercial real estate investment in 2024. While geopolitical circumstances and health crises presented challenges in previous years, they are unlikely to stall the UK’s commercial property market’s momentum. Notably, the decreasing appeal of Germany as a commercial property hotspot is expected to further solidify the UK’s position.

UK’s favourability amongst investors escalated from 27% in the third quarter of 2021 to 29% in the final quarter, even as France and the United States experienced increases in investor interest. While 2022 was a prosperous year for the UK commercial property market, 2023 experienced a somewhat slower growth rate. Nevertheless, despite global challenges such as the health crises, the commercial property investment sector is predicted to thrive in 2024, further buoyed by political stability.

UK Commercial Property Investment – Over The Years

In 2017 Germany slipped from the top spot to the fourth position behind the United Kingdom, the United States and France, according to a number of commercial property investment barometers online.

Germany saw a decline in popularity from 34% to 23% in the last quarter of 2017, marking its lowest ranking since the second quarter of 2016. The United Kingdom, however, rose from 27% to 29% and continued to retain its advantageous position by steadily rising above 25%.

Both the US and France also gained popularity with investors. Almost 19% preferring the US over other regions and 18% selecting France as their favoured spot, up 4% since the second quarter of 2016.

The primary investment target for investors was the highest income-seeking rate at 38%. This increased by 6% from 32% in the third quarter of 2017.

The report notes that interest in secondary cities as target markets continued to rise steadily from 37% in the third quarter of last year to 41% by the end of 2017. These include cities like Birmingham, Newcastle and Bristol.

Significant changes have taken place in other areas of the results, including a greater focus on income hunting and the increasing prominence of secondary cities as target markets,’ he said.

‘As the year progresses and we continue to perform our barometer, it will be fascinating to see how the industry adapts to the underlying factors influencing the real estate sector,’ he said.

Shawbrook Bank’s annual broker barometer showed an optimistic outlook for commercial property finance in the United Kingdom going forward, with 78% confidence in the lending climate in the sector amid Brexit.

It was up from 72 per cent in 2017 and research also revealed that 69% of brokers were optimistic of business growth in 2018 after 27% saw a 30% rise in sales in the second half of last year.

The three most significant challenges that commercial mortgage brokers surveyed expect their businesses to face in 2018 were

credit constraints cited by 26%, while 25% reported regulatory reform and 16% valuation issues.

‘In view of some of the uncertainties around the developments in the PRA and the potential effects of the Brexit, it is promising to see so much positivity in the commercial mortgage broker market in the coming year,’ said Karen Bennett, the bank’s managing director for commercial mortgages.

‘It’s also great to see so many brokers showing such promising results in company volumes, demonstrating the robustness of the commercial mortgage industry,’ she said.

Property Sales In The UK Fell In December 2017 – Official Figures Show

Government estimates showed that property prices in the United Kingdom had declined by 3.9% between November and December 2017 and by 0.1% relative to 2016.

The Land Registry data revealed that there were 99,100 residential sales in December and 10,390 non-residential transactions.

Non-residential property transactions decreased by 3.3% between November and December 2017 and were 3.3% lower than the same month in 2016.

‘However, the fact that the sector remains resilient in the face of substantial economic and political change is a cause for optimism rather than concern. There is room for business pocket growth in 2018, ” Stephen Wasserman, Managing Director of West One Loans said.

He assumes that, following the abolition of stamp duty for the majority of first-time buyers, lenders are likely to boost their offerings to new homeowners, and competitive mortgage rates will help to stimulate development in this sector.

‘However, the high cost of moving further up the property ladder means that transactions in this area remain limited, with many choosing to improve rather than move. The government has stressed its commitment to raising house building standards, and concrete progress on this front is needed to achieve a substantial boost in housing development. While house price growth has slowed in recent years, affordability issues remain and more stock is needed to boost accessibility to the property ladder, ” he added.

He claims that customer and investor trust in bricks and mortar has declined marginally following a period of rapid growth in the sector. ‘In view of this, we are optimistic that the market will demonstrate its resilience and that the transactions will lookup again in the coming months, as the implications of the increase in stamp duty begin to be seen,’ he said.

‘Last year, we saw a steady rise in borrowers taking out bridging loans, and that was reflected in a solid year for the sector, with gross annual lending in excess of the pre-Brexit peak of £4.7 billion. Such investors will continue to make the most of the versatility and pace of this specific form of financing bid, making it a great match to handle unpredictable times,” he added.

First-Time Buyers Struggle To Find Stamp Duty Exempt Homes In London

First time London buyers are struggling to take advantage of the stamp duty exemption introduced last year because there are few properties priced small enough to meet the £300,000 or lower quality requirements to stop paying the fee.

New research by online estate agents HouseSimple revealed that there are only 387 homes for sale in London Travel Zones 1 and 2, which would be free of stamp duty for first-time purchasers, and when Zone 3 is introduced, it increases to just 1,235.

The Kensington and Chelsea boroughs had the fewest stamp duty-free homes, with just six of them, including a small 113 square foot studio apartment in Earls Court. In the districts of Camden and the City of Westminster, each of which had only 18 stamp duty exempt assets on the market.

It indicated that, for the first time, buyers would choose to move to the Croydon area, which is in travel zone 5-6, for the most considerable number of stamp-duty free properties on the market. Croydon had 795 assets worth £300,000 or less, more than twice the amount of every other London borough.

The truth is that, for the first time ever, buyers will always have to pay stamp duty if they’re looking to purchase in London. According to HouseSimple, there are 4,490 properties in Zone 1-2 and 7,687 properties in Zone 1 to 3, which are currently on the market at between £3000,001 and £500,000 and will be liable for a reduction in stamp duty of £5,000.

“The Chancellor rolled out his big tax cut deal last autumn to help first-time buyers and draw young voters. Sadly, for the young London buyer, the stamp duty cut, while helping vast swathes of the world, is not going to make much of a dent in their household budget purchases,” said Sam Mitchell – Cheif Executive at HouseSimple.

‘Even a stamp duty saving of £5k on property up to £500,000, which is not anything to be sniffed at, would be of little benefit if, for the first time, buyers do not have the funds to make significant deposits required to purchase even a modest starter home in Inner London,’ Mitchell said.

‘London sees an influx of young people who would prefer to travel to more prosperous parts of the country than to purchase from outside London and face long journeys every day. With the rise of business centres in other major cities across the UK having housing that costs considerably less money than in the capital, London is no longer the economic advantage it used to be,” Mitchell added.

Rents In UK up 1.7% in 2017 – According To Index Data

Rents in the UK rose by 1.7% in December 2017 compared to the same month in the previous year, bringing the average monthly rent to £907, the new index reveals.

However, the demand is unpredictable with data also showing that rents in the South East of England were 1% lower in December 2017 than in the same month in 2016 and dropped year-on-year in the area every month in 2017.

The East Midlands saw the highest rate of rental price growth in December, with rents rising 4.6 per cent year on year, according to the HomeLet index, to £611 a month, but lower than most regions of the country other than Wales and the North East.

Rental rents rose 3% last month in three other areas, in the South West, North East and Northern Ireland with 3.3%, 3.2% and 3.2% respectively.

Rents in Wales were flat year-on-year in December and lowered by 0.8 per cent month-on-month to £605 while rents in Scotland were up 1.8% year-on-year to £614 but down by 1% every month.

In London, rents increased by 1% year on year, even after the city reported falling rents in five months of the year. The average rent negotiated in London was £1,524, down 0.4% per month.

The index report shows that overall rent growth was much more stable over the course of 2017. By comparison, rents increased steadily in 2016 at an annual rate of more than 4% in the first half of the year, before dropping back in the second half of the year.

And rental price growth remains moderate in the light of recent levels. In December 2015, rents rose 3.7% on the same month of 2014, a year in which rental price inflation never dropped below 3.5%.

Data for December 2017 also showed that rents were expected to increase at a slower rate than general inflation every month of last year, with consumer price index inflation at 3.1% in November, the most recent time for which official figures are available. The last time average rents rose faster than inflation was in December 2016, when the HomeLet Rental Index reported a rise of 1.7% compared to a CPI of 1.6%.

According to HomeLet’s Chief Executive Officer, Martin Totty, 2017 was a year in which rent price growth was moderate. ‘In fact, we have seen average rents fall across the country in May and June, and although this has not been replicated in the second half of the year, we are still a long way from the much higher rates of rental price inflation that prevailed in 2015 and most of 2016,’ he said.

‘We continue to see a very mixed picture regionally: in areas of the world where rents grew less rapidly in 2015 and 2016, rental price inflation was much higher last year; on the other hand, those areas where rents have previously been growing more rapidly have seen much more modest rises,’ he added.

2024 UK Commercial Property Forecast

The current landscape of UK’s commercial real estate is fascinating, with prices not only varying across different markets but also moving in contrasting directions. This diversity suggests that investors can strategically distribute their investments across multiple real estate markets rather than focusing on just one. The most significant disparity is observable between the retail sector and industrial warehousing.

In the year leading up to September 2023, the capital prices for UK warehouses saw a 5% increase, reflecting the burgeoning demand in the e-commerce and logistics sectors. In stark contrast, retail equity experienced a decline of 13%, a trend that echoed across the whole of continental Europe. Meanwhile, the office property segment is witnessing a fragmentation of its own. While central city offices are increasing in value due to the renewed interest in hybrid working models, several suburban office parks have seen a decrease in value. The ever-evolving trends in the commercial property market make it a dynamic and complex sector for potential investors.

 

Which Commercial Property Markets Do We Favour?

Offices

Winning cities with a good diverse mix of economies like London, Manchester and Bristol continue to be favourable among investors. Occupancy rates in these cities are at their lowest in 10 years, and although construction is on the rise, growth in office rents is unlikely to be halted.

Though city centre yields tend to be costly (or low) at 2.75-3.0 percent, yields are higher in neighbouring areas, and we believe refurbishment projects will produce attractive returns.

Retail

The retail business is tricky. Although the overall sector is repricing, today’s current yield of 7-8% will rapidly vanish as leases expire and retailers collapse into insolvency. The real chance is to convert unused retail space into other uses including hotels, offices and residential space. That should be feasible in places where competing uses need it.

In city centres and shopping parks in prosperous parts of southern England, we see strong prospects for redeveloping old shops. Re-use of secondary shopping centres in towns and cities with weak economies would be much more difficult.

Retirement Homes & Supported Social Housing

We’re excited about hotels with management contracts, retirement villages and social housing outside of the critical sectors. We believe that in UK private retirement communities, there is potential demand for around 150,000 units, which is three times the existing stock. This reflects an ageing population, the wealth of many over-65s and the need to reduce elderly loneliness. We also expect demand for socially supported housing to grow as the government allows more people living in the community with learning disabilities and autism. Generally, people moving into publicly funded housing experience a greater quality of life and also gain trust.

To conclude, not all areas of the UK commercial property market are late stage. Developers tend to take a cautious approach, and the difference between real estate and bond yields remains generous. Although retail is struggling and some offices and logistics are now looking costly, we believe that offices in some inner-city locations and regional cities, multi-let industrials, value-added ventures, retirement communities and socially funded housing have the potential to produce attractive returns.