Looking at the forecast for UK commercial property in 2023 at the end of last year, the most likely outcome was for a slow start to the year, following a weak Q4 ‘22, before investment volumes and capital values increased in the second half.
This took into account opportunistic buyers continuing to wait until asset prices reach their nadir – probably towards the start of the summer – with structural buyers taking the first half of the year to become comfortable that occupier dynamics had not materially changed; if your strategy in 2022 was to invest in European elderly housing due to long-term demographic shifts, by H2 2023 you’re likely to be comfortable that nothing materially has occurred to alter this approach.
But as we begin to look towards the start of February is that too pessimistic in light of a series of economic metrics since announced that have been surprisingly positive?
Reported Christmas retail sales have, thus far, been largely robust, even though it was a last hurrah for many consumers who were enjoying the festive season after two years of Covid-19 before tightening their belts this year; GDP actually grew (albeit very slightly) in November, confounding expectations; and wholesale gas prices have fallen. Is it possible that the UK may now avoid recession and, instead of it being a year of two halves for property investment, could it be a year of a short period of negativity soon forgotten among three quarters of recovery?
While the economic indicators have been better anticipated and the recession may either be avoided or, failing that, shallower than predicted, I think that it’s too early to call a Q2 bounce back, although I would love to be proved wrong.
Consumer confidence is likely to remain weak, as interest rates remain at circa 3.5 per cent for several more months and domestic energy prices remain high compared to the years prior to 2022, leading to a softening in spending and a corresponding decline in occupier demand for logistics space from the peaks seen in 2020-21, although long-term near-shoring and shortening supply chains trends will support future demand and rental growth for logistics and manufacturing space.
The same applies to the retail sector, although here capital values were adjusting before Covid-19, and need less correction to reflect higher base rates. Vacancy rates are expected to decrease in H2 with some rental growth in some sub-sectors. High street shops in suburban and commuter towns are likely to outperform, given work-from-home trends, while bulky goods retail warehousing is exposed given its dependence on the sale of big-ticket items, although it will continue to deliver some of the best total returns over the next five years.
In offices, meanwhile, even with a brighter economic outlook, some SMEs will be burdened by the debt they’ve taken on over the last few years – debt which now has a higher interest rate – resulting in lower office occupancy levels and rising subletting. Long-term, however, given the overwhelming lack of UK offices with high environmental ratings, and a fall in speculative development due to the tightening debt market, rental growth for prime offices remains deliverable.
Taken together therefore, I currently remain cautious about short-term performance and investor activity and believe that the indicators are still much stronger for H2.
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