Investors Become More Pessimistic Over UK Commercial Property
UNITED KINGDOM – While data from CoStar showed that investment in the country’s commercial property sector surged to £60 billion in 2021 from £40 billion in the prior year, real estate investors have turned cautious towards the commercial real estate (CRE) market, reported The Business Times on Friday evening (23 September, SGT).
Although this is the highest figure since 2017 when commercial property investment in the UK hit £62 billion, two indicators show that investors have grown more pessimistic about the market due to recession fears and higher interest rates.
According to a recent research by the Royal Institute of Chartered Surveyors, more than half of respondents believed that offices, shops, and warehouses are in the early stages of downturn, with the majority of respondents having seen a deterioration of credit conditions.
In comparison, less than 25 percent of the respondents in the prior survey in April had this bearish stance.
Another indicator is the performance of the country’s biggest real estate firms. Since the start of the year, the stock price of Land Securities Group (Landsec) fell by 29 percent, British Land by 31 percent, and that of Hammerson plunged by 50 percent. Moreover, warehouses have outperformed the retail and office sectors.
Schroders’ Head of UK real estate investment Nick Montgomery expects the capital values of commercial properties in the country could drop by 10 percent to 20 percent between end-2021 and end-2023. Most of the fall will be due to rising property yields arising from interest rate hikes, he said. Net property yields have already increased to 4 percent to 5 percent versus about 3 percent in 2021.
While there’s a chance that some asset types like warehouses will see an acceleration in rental growth, Schroders projects that average values would be flat.
“It’s unlikely that any part of the market will completely escape the downturn,” noted Montgomery.
“We expect that total returns would then settle at 6 percent to 8 percent per annum from 2024 to 2026, assuming real estate yields find a new equilibrium level and rental growth resumes as the economy gains momentum,” he added.