The author of this article - working at a property consultancy - looks at the UK's commercial market for brick-and-mortar assets and argues that signs are already in place that the sector is recovering, and why.

The following article examines the UK commercial real estate investment market, and how, in the author’s view, there are signs of an improvement following a tough period. The author is Ian Lambert, investment partner at Hartnell Taylor Cook, a property consultancy. The editors are pleased to share these comments. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com if you wish to respond. 

Last year’s slowdown in activity was frustrating for the investment market. However, owing to diminished competition as funds and property companies severely curtailed their investment ambitions, cash-rich family offices are putting their heads above the parapet and snapping up prime assets which they might normally have had difficulty securing. The message nationwide is that cash is king and the canny cash buyer can pick up some bargains ahead of the wider investment market starting to invest again.

Activity on the up
Despite a rocky 2023, investment activity across the commercial property sector is on the up. 2023 resulted in a total deal volume across the UK that was well below the 10-year average of £53.4 billion ($67.6 billion). Figures for the fourth quarter, however, began to show a more positive picture, seeing a 14 per cent increase quarter-on-quarter, albeit still 15 per cent below the average. However, this upward trajectory has followed into 2024, with activity and deals across the country picking up despite a continued climate of geopolitical uncertainty, abetted by easing inflationary pressures and interest rate cuts potentially on the horizon.

A trigger
Whilst these growing numbers are currently green shoots of positivity, they will likely spur further action down the line. Creating a herd-like mentality, a group commitment and sense of optimism provides the impetus required to kickstart an active investment market. As investment in property becomes increasingly attractive and deals continue to be completed, confidence is building throughout the market, creating a domino effect of sorts.

Price discovery’s influence
Determining how much properties were worth was difficult throughout last year due to the unfavourable market conditions causing a downturn in activity. In turn, sellers were reluctant to offload properties and trade at significant discounts to valuation and preferred to hold onto assets in the hope that they might see a better price further down the line. In the same vein, those wanting to buy may well have been waiting to see prices come down. “No one wants to catch a falling knife” was the worst phrase of 2023! 

However, as the market has slightly improved; in Q1 2024 we are seeing more transactions happening, making pricing comparisons slightly more straightforward and boosting market confidence.

ESG demands affecting sales
Environmental considerations continue to be a top priority and there is a desire to provide best-in-class assets where possible, as well as continuous improvements necessary to meet upcoming EPC [energy performance certificate] regulation deadlines. Buyers are reluctant to purchase second-hand buildings where significant additional refurbishment costs are required to bring the properties in line with tenant requirements and energy performance certificates of B or above. Many older office buildings are now being repurposed altogether for alternative use, often residential or student accommodation or, if occupying a decent site, being demolished for industrial development.

Prices have bottomed out
Ultimately, prices have bottomed out and the savvy buyer should be acting now to take advantage of uncertainty before the upturn. There are certainly some good deals to be found but as borrowing rates edge down, geared buyers will re-enter the market, providing competition. We are already seeing vendors withdrawing sales previously under offer, as they believe they are now under selling and can remarket later in the year at a better price. Delays in spending will only mean that buyers find themselves with increased competition for stock as the investment outlook continues on its upward trajectory for the remainder of 2024.

In summary, investors can take comfort in the knowledge that following a below average 2023, owing to a variety of economic factors, the waters are beginning to steady and those wanting to buy should soon find their footing on more familiar ground. Optimism crept in at the end of last year and is now beginning to build in the market, which, despite ongoing wider geopolitical concerns has now bottomed out with the promise of easing inflation and a reduction in interest rates. Whilst we are set to see more stock come to market – in particular, from local authorities where financial hardships are forcing them to consider selling large segments of their property portfolios – buyers seeking to invest should do so sooner rather than later.