Total UK commercial real estate investment volumes are predicted to fall by a third on last year and the long-run average, according to BNP Paribas Real Estate, which has forecast that £41 billion will be traded in 2023.
Sharing its predictions for total UK commercial real estate investment into 2024, the property consultancy company found that £18.5 billion was spent in the first half of 2023, less than half the volume compared with the same period last year. It blamed higher borrowing costs.
Analysis of investment trends during the first half of 2023 showed a shift by buyers towards prime retail assets. The agency said assets of this type were now in "high demand", with investment in traditional West End locations in London reaching £810 million.
Assets, specifically those in the office sector, which demonstrate the very best environmental, social and corporate governance credentials, continue the flight-to-quality momentum and attract tenants, BNP Paribas added. It said that law firms were major players in the office market, taking 500,000 square feet of space in H1 2023. This accounted for 11.5% of total central London take-up.
Industrial investment volumes fell 63% year-on-year in H1, according to the report, while capital values fell circa 25% in the year to the second quarter of 2023. BNP Paribas added that yield shift had "slowed considerably" and prime yields had "been flat since the start of the year after rebasing circa 150 basis points higher since the first quarter of last year.
But it said that investors continued to see value in industrial's long-term structural trends, with the rental growth forecast predicted to remain positive.
According to the property consultancy, the peak Bank Rate, which it anticipates could reach 5.5%, will "keep investors on the sidelines" as they refrain from decision-making in volatile conditions.
It predicted that rate cuts will arrive in the second quarter of next year, bringing some marginal improvement to the market and leading to a 15% rise in investment volumes to £47 billion by the end of 2024. But it suggested that many investors will still be tempted into waiting for borrowing costs to fall further before acting.
Vanessa Hale, head of research and insights at BNP Paribas Real Estate, said: “The impact of an ever rising base rate on real estate transactions has been stark, with the first half of the year failing to deliver a meaningful recovery for the UK CRE market. However, there is more activity coming through, albeit slowly, and investors are now very sensitive to data releases so any momentum remains complex.
“While inflation continues to restrain activity, the market should be encouraged by the lack of distressed assets coming through. Lenders are clearly reluctant to call in badly performing loans that would require asset sales while conditions are tough. Healthier balance sheets and resilient rental growth in key sectors and locations is keeping covenant breaches relatively low.
“That said, the reprieve in borrowing costs that we’ve seen in recent weeks has likely come too late for a small number of owners. The Bank of England’s latest survey of lenders suggested that the availability of debt will worsen over the short term. Institutions, though not distressed, are also likely to remain net sellers for the time being. Well capitalised private investors are in a fantastic position to build portfolios for the next cycle."