More liquidity?

As this is being written, the market uncertainty across all sectors has risen. Driven by the US tariffs and the subsequent retaliations, the outlook and sentiment are changing by the hour. The start of April 2025 will be remembered for one of the largest global economic events. For commercial real estate, this brings a much, perhaps unprecedented, higher degree of uncertainty affecting all types of real estate.

The Q1 data for UK commercial volumes are expected to be lower than the long-run average, and the true number will not be known until later this month. However, there is feeling amongst the investment advisory teams that more positive sentiment has increased, which will initiate improved liquidity. Even before the tariff announcements, the belief was that more vendors were willing to accept new (i.e. today’s actual market) pricing in the expectation that macroeconomic and geopolitical uncertainty is not going away or receding anytime soon.

It would be fair to say that investors are poised for investment into an improving UK market, in occupational terms. An improvement is supported by the latest data showing rental and capital growth moving into more positive territory across all commercial sectors. There is also evidence of private real estate funds on the rise again, which supports this notion of improving investor sentiment. The yield data now shows one sector back below 4% and a downward trend on City Offices. Is London leading the way for the wider UK office sector? We have seen this in previous cycles.

Where’s the corporate growth in the UK?

Economic growth and occupier demand are inextricably linked. Most of 2024 was a year saying growth is around the corner and things will be better in 2025. However, levels of uncertainty with (geo)politics and the most recent economic events continue to create new/faster headwinds.

The UK Government remains committed to driving economic growth – it has to. Growing the size of the economy and job creation is and must remain the key focus. Before the early part of April, the focus had been on ‘pulling’ the levers of growth by slimming regulation and focussing on a credible, achievable and deliverable Industrial Strategy (to be published in June). However, as the Chancellor has repeated many times since the Spring Statement, “the world has changed”. The world will continue to absorb the ‘Liberation Day’ in the US, as investors try to grapple with the implications and the aftermath – it will feed through over many years. This has brought uncertainty, but it is still too early to fully understand the risks.

It remains challenging to predict the next phase and outcome of one of the biggest economic experiments. No sector in the UK is independent of these global events, but it is helpful to focus on the positives. In terms of future occupier demand, it is important to review the scale of recent corporate financial activity by UK-headquartered companies. This injects a degree of positivity.

Financing events result in commercial real estate activity, often acquisitions. As shown in the chart below, the UK data represents the value of the financial events, which includes IPOs, M&A activity, refinancing and venture capital. With £440bn of financing activity, 2024 was the second highest level of the past decade and showed 31% annual growth. The beginning of 2025 is showing a similar potential outcome as for 2024, and it is encouraging to see that the average deal size is well above the long-run average. Whilst acknowledging there is a lagged impact on real estate demand, this activity will bolster occupational markets in the short-to-medium term.

In times of uncertain equity markets, Real Assets look like a great inflation hedge, and with sentiment expecting interest rate falls, relative pricing of the property market could become more compelling.

Reviewing the relative performance – and the resulting gap – of the office sector prime yields compared to the rest of the commercial sub-sectors is interesting for investors. We last looked at this seven months ago and flagged that an improving occupational market for offices was not being reflected in the yield spread. Since the end of last year, beginning as a flicker, there are signs that the gap of office and other sectors is reducing at the same time average prime yields for all non-offices are lowering. This reflects the sentiment regarding improving liquidity, as discussed above. Considering the current gap to 2023 yield levels, supported by occupational positivity in some markets, it is expected that Provincial Offices will trend downward this year.

Manchester and the City of London have seen an increase of over 1 million sq ft devoted to F&B and leisure uses in the decade to 2024. That’s a 76% and 28% increase in units since 2014, respectively. Growth in the West End has been just 13%, but this is based on the fact that it was already biased to these uses. Other cities have been playing catch up, and it provides some indication of the opportunity still present in key regional cities. Around 75% of this growth has been through conversion of existing units rather than new development, so is a clear sign of repositioning in action.

This evolution is not simply driven by the need to replace empty retail units, though vacancy has certainly provided ample opportunity. The period coincides with an explosion of new food & beverage operators and leisure concepts, driven by consumers that are increasingly looking to seek new ‘real life’ experiences and satisfy new tastes.

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