At the start of 2024, various areas of uncertainty were inhibiting buyers and sellers in the commercial property market. We hoped they would diminish. Like all hopes, some of what we wished for came true, but not all! As quickly as political uncertainty ended, economic uncertainty ensued as the new chancellor imposed her first Budget.

The recovery within the wider economy, although initially hampered by inflation and higher interest rates, started to gather pace as the year progressed. Staggered rate reductions were welcomed. Although their frequency was slower than many had predicted, their trajectory was favourable for the auction market. Conversely, the first Budget did have some stings in its tail.

The occupational retail market saw a marked improvement over 2024, with the MSCI reporting 1.9% rental growth for the year to October 2024 (29% negative growth in the 12 months to May 2023), thus underpinning hopes of further recovery on the high street. Prime industrial and retail yields did start to harden. In the office sector, investors remained cautious as the rhetoric around working from home continued rather than diminished.

Meanwhile, in the auction ‘room’, we experienced a sustained supply of stock for sale. We brought 757 commercial properties to market, more than double the number in the previous year. A supply shortage in the wider secondary investment market attracted new bidders to our auctions, thus contributing to the resilient prices achieved. The average commercial property lot size was nearly £500,000 (£480,000 in 2023). 64 commercial properties sold for more than £1m. 121 lots were sold for over £1m across the wider Savills auction team. Overall commercial auction sales receipts were also up, with £237m raised (£108m in 2023) – a 119% annual increase.

Private investors, not least in the auctions market, were quick to capitalise on any market weaknesses. Top picks for private investors in 2024 included good quality high street retail, where rents had rebased and yields remained very high, and some urban logistics opportunities, where pricing looked like it might have overcorrected.

Looking forward to 2025

Will investors be more confident about UK commercial property in 2025?

We are optimistic for 2025. Our buyer survey reveals a similar sentiment, with 95% of commercial investors looking to reinvest. 100% of those buyers looking for ’value-add’ opportunities said that they would be bidding again. We expect to see borrowing costs continue to fall, through both a gradual reduction in the base rate as well as through increased competition amongst commercial lenders. We anticipate further cuts of 100 basis points over the course of 2025 and 2026. There is, however, a wide range of views around the forward trajectory for interest rates, and this remains an uncertainty for investors both at the point of purchase and the eventual exit.

Many areas of uncertainty that we faced a year ago have dissipated. Political risk, at least in domestic politics, has diminished. It is a reasonably credible argument that the UK looks less politically volatile than many of its European neighbours.

The shape of the economic recovery is also clearer than it was. Whilst forecasts have been revised downward a little post-Budget, there is a widespread acceptance that 2025 and beyond will see accelerating GDP growth – and this has traditionally been good for real estate.

Occupational market performance has been strong. Will this strength continue?

One of the paradoxical characteristics of the commercial property market in the UK in recent years has been the strength of many of the occupational markets through Covid and thereafter. This is reflected in many metrics, not least the relatively low vacancy rates normally expected during a recession, the comparatively strong take-up of space and ultimately the elevated rental growth that has been experienced in many markets.

Retail accommodation made a significant contribution to our auction catalogues (32% of lots in 2024). The occupational market, and therefore rents, continue to strengthen. Consequently, we would expect to see investors increasingly favour the retail sector.

An improving economy will result in business expansion, and this will lead to rising demand levels not only for shops but also for offices, factories and warehouses. Furthermore, lower levels of cost inflation should be good for business. The one wrinkle in this otherwise positive outlook is the fiscal regime. The surprise rise in employers’ national insurance contributions will mean that most companies will now have to look to raise prices or reduce spending to maintain margins. This will be felt in the leasing markets, and we have therefore moderated our take-up forecasts a little to reflect a more cautious corporate environment in 2025.

SELLERS AND STOCK

The proportion of distressed sellers is unlikely to increase as banks continue to work with borrowers and assist refinance or sale. The granular transactional market will continue to be dominated by private individuals and property companies. Funds will continue with their disposal strategies as they regear their portfolios and meet redemptions. Traders will take advantage of stock coming online as rates begin to drop and the market continues its upward trajectory.

OUTLOOK

Although we have a clearer outlook now than we did six months ago, the chancellor’s recent Budget and the activities of bond vigilantes have raised questions around the economic performance of the UK.

Despite these headwinds, many will see opportunities, and we would expect to see purchasers of high street assets throughout the country capitalising on the positive retail narrative. Well-located properties and those with potential to add value should also attract improved competition in the auction room. Development opportunities will be sought after as build cost inflation abates and the government’s drive towards planning reform gathers pace.

Offices remain the one sector where prime yields are yet to harden – but 2025 will be the year that this happens. The recent rental growth story is undeniable and no longer just limited to super prime. Most major office locations have no new office buildings due for completion in the next three years. So, with limited medium-term supply and sustained tenant demand, office investment yields are likely to fall.

In conclusion, 2025 promises to be a year of growth and opportunity for the commercial property market as investors look set to navigate both the challenges and the potential rewards.

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_{Read the articles within Auctions Review 2024 & Outlook 2025 report below}