The combination of home working, weak economic growth and rising interest rates created a tough environment for the UK commercial property sector, which has persisted in spite of an economic revival.
Companies do not need as much space, which has depressed rents and valuations, meanwhile money exited the sector, lured by the higher yields on offer in fixed income. However, there are tentative signs of a change in fortunes.
The Royal Institution of Chartered Surveyors commercial property monitor shows the UK market reviving in the first quarter of the year, led by some notable deals. For example, BT Group agreed the sale of the BT Tower for £275mn to MCR Hotels, who plan to preserve it as an iconic hotel.
Tenant demand rose 4 per cent, with the industrial sector particularly strong and office demand rising for the first time since 2022.
In the same week, Mark Allan, chief executive of Land Securities, said the market for higher quality UK commercial property was improving.
“Macroeconomic signals look more encouraging than they have for a while . . . absent any further macro shocks, we think the value of high-quality assets has largely bottomed out and will start to grow in the foreseeable future as rents rise,” Allan added.
That is not to say that there are not still problem areas. In February, some of the commercial property sector’s problems were laid bare with the disastrous sale of Canary Wharf office, Five Churchill Place. This was sold at a 60 per cent discount to its last sale price and became a bellwether for the difficulties in the market.
The biggest factor in the recent revival appears to be a stabilisation of interest rate expectations.
Marcus Phayre-Mudge, fund manager of TR Property Investment Trust, says that share price action is still being driven by base interest rate expectations to some extent, but as the path on interest rates becomes clearer, investors are beginning to differentiate between the less desirable elements of the sector and companies that own quality assets and have strong balance sheets.
Phayre-Mudge says: “These false dawns have led to many investors remaining on the sidelines, awaiting harder evidence of base rates falling. Our central case is that this point is drawing ever closer, but crucially, our positioning and optimism is not dependent on major reductions in interest rates. The companies we own have balance sheets which can withstand rates remaining at current levels.
“The spike in takeover activity this past year shows acquirers are rushing in to take advantage, where public markets have left quality assets languishing at significant discounts.”
This has been seen in some frenzied merger and acquisition activity among property investment trusts.
In the past couple of months alone, Abrdn European Logistics Income concluded its strategic review and said it would wind down, while Brookfield Asset Management said it was assessing a possible cash offer for Tritax EuroBox.
