UK commercial real estate transactions should reach a modest £50 billion in 2024, reflecting a weak first half and then recovery in the second part of the year, global broker Colliers said in its annual look ahead.

The £50 billion figure would be a marked improvement on the circa £40 billion both Colliers' and CoStar's data are projecting for 2024. This year's figure will be down around a third from 2022’s £60 billion and the weakest year since 2012.

Colliers is predicting a first interest rate cut by the Bank of England by mid-2024 with the bank rate at between 4 and 4.25% by the end of 2024. That will mean yield expansion stabilises by mid-2024 with signs of "recompression" later in the year. Colliers says prime rents will continue to grow across all sectors reflecting shortages of prime space. Sub-prime rents will show increasing weakness, especially for assets that are not environmental, social and corporate governance compliant and are not easy to adapt to new working formats.

While it will be a slow start to the year, the first half will offer opportunistic investors the chance to snap up assets with limited competition, Colliers suggests. It says this is because investors who have readily available cash will be able to move faster than those dependent on debt.

Walter Boettcher, head of research and economics at Colliers, expects the UK commercial property market to enter an "opportunistic phase" in first half of the 2024 as increasing numbers of landlords facing refinance and higher debt costs begin to bring greater volumes of product to the market.

In a statement he said: “A further short but sharp increase in yields is also expected in H1 2024, driven in large part by growing ESG concerns. Along with a lower interest rate trajectory this will also contribute to a material increase in transactional activity in H2 2024. As it stands, we expect next year to record transaction volumes of £50 billion, still below par but up on the circa £40 billion recorded in 2023.”

Colliers said the second half of the year will enjoy a "widely anticipated sense of market stability" as the Bank of England lowers interest rates. That will have a direct impact on the reduction of debt costs for many investors and will see a return of more lenders and competitive offers in the market. As inflation falls close to the government target of 2%, the cost-of-living squeeze on households and discretionary spending will also begin to ease, it says.

Laurence Richardson, director in the debt advisory team at Colliers, points out that a growing consensus and the latest swap curves suggest that rates have peaked and may begin to fall in mid- to late 2024. But he warns that if cuts come sooner, they may be linked to a darkening economic outlook.
 
Richardson adds: “Next year, [loan to values] for senior lending are expected to remain capped generally at 55%. Banks will continue to jostle with resourcing challenges presented by tricky legacy ‘backbook’ transactions while simultaneously wishing to originate new, high-quality transactions in a thin acquisition market. Alternative lenders will still secure attractive risk-adjusted deals due to more flexible risk analysis and underwriting processes than traditional lenders.”

• Colliers says further price adjustment is likely in the operational real estate sector before investors return. The reticence is due in part to comparatively low historic yields in the sectors.
• Emerging sectors such as coliving will see increased activity.
• In 2024, appetite to nail down the “S” or the social in ESG will arise.
• Following marginal growth in 2023, a challenging economic outlook will continue with construction output expected to flatline in 2024. A "wait-and-see" approach by many developers and occupiers will slow new development.
• Industrial will prove to be a safe bet for investment, despite supply increasing over the first three to six months of next year. A lack of new speculative development will create a "supply pinch point" for prime warehouses between the fourth quarter of 2024 and the first quarter of 2025 that may also lead to another surge in rents. Investors will continue to focus on value-add opportunities where they can drive performance though lease events in the short term to boost returns.

Boettcher said: “Next year looks more positive than 2023 but as we’ve learned in the last five years there are plenty of ‘unknown unknowns’ that could thwart this optimism. Reflecting on 2023 as a year of disrupted recovery after the pandemic hiatus, we should look into 2024 as a year of great promise.”