Despite a backdrop of economic volatility in recent years, the sector remains a sound investment opportunity across multiple asset classes. While certain sub-sectors, such as office spaces, have faced particular challenges, the overall market retains its position as a reliable and robust asset class for investors.

Resilience despite economic challenges

Following a period of uncertainty marked by inflationary pressures and rising interest rates, the latter part of 2024 has brought signs of stability. Interest rate cuts are still on the horizon and are widely anticipated to boost investor confidence and provide much-needed relief in debt costs – when they arrive.

Lower rates are expected to stimulate investment activity, allowing the market to recover from the significant drop in capital values experienced in sectors like offices and industrial properties in 2022. Retail spaces, while facing structural changes, have fared somewhat better, and the overall capital value decline has slowed markedly.

With inflation now below the Bank of England’s target of 2%, the stage is set for a more positive outlook across the sector. Investors can anticipate improved returns driven by stabilising yields and the potential for capital appreciation across various property types. While rate cuts haven’t taken place as frequently as predicted earlier in the year – largely because of stubbornly high inflation – expectations still point towards a downward trend.

Key drivers for growth

Significantly, the Labour Party's landslide victory in the general election has created a more predictable political environment. With a clear mandate to implement policies that foster growth, the new government’s emphasis on reforming planning and increasing infrastructure investment is likely to have far-reaching positive effects on the property market.

Among the initiatives set to benefit the sector are the ambitious targets for housing delivery, including a proposal to build 1.5 million homes during the parliamentary term. These plans, while challenging, signify a much-needed boost for the housing sector and related commercial markets. Moreover, the government’s commitment to infrastructure development, with a pledge of £1.8 billion for upgrading ports and enhancing supply chains, will further stimulate demand in industrial and logistics sectors, often seen as bellwethers of commercial property health.

Increased infrastructure spending, along with a proposed review of business rates, is expected to create favourable conditions for investors across the property spectrum. Commercial properties stand to benefit not only from direct government support but also from the anticipated rise in consumer and business confidence that comes with political and economic stability. Of course, we all look towards the October Budget to get a clearer sign of the government’s methods to boost growth and improve the country’s finances; the Chancellor needs to get her tactics right if things are to improve.

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Sector-specific trends

While the overall market remains robust, individual sectors display varying performance levels. The industrial and logistics sectors continue to outpace other asset classes in terms of rental growth and investor interest. Forecasts suggest that industrial properties, particularly retail warehouses, will be the best-performing asset types through to 2028, driven by sustained demand and limited supply. This resilience is reflective of the long-term trends favouring e-commerce, which has fuelled demand for warehousing and distribution facilities.

On the other hand, the office space market has faced headwinds due to changing workplace dynamics, including the shift over recent years towards hybrid working models. However, despite these challenges, there are signs that office space may be stabilising as businesses seek to optimise their real estate portfolios. 

Investors are becoming more selective, focusing on high-quality assets in prime locations that offer flexibility and sustainability. This trend aligns with broader market preferences for properties that cater to modern occupier demands, particularly in terms of ESG factors.
The retail sector, which has been undergoing significant structural change, also shows signs of recovery. While the increase in vacant retail space has been a concern, the recent RICS UK Commercial Property Survey indicates improving demand. As consumer confidence rebounds alongside economic recovery, retail properties are likely to experience a resurgence in both footfall and investor interest.

Forecasting the future

Looking ahead, the outlook for the UK commercial property market remains positive, albeit with cautious optimism. CBRE is forecasting that capital values across all property types are set to rise by 5.2% in 2024, accelerating to 7.0% in 2025. These figures, coupled with mild yield compression, are expected to result in total returns of 10.2% for 2024, further increasing to 11.9% in 2025.

The yield spread between property and government gilts, which widened to a 15-year high of 308 basis points at the end of 2023, is forecast to remain stable. This provides an added layer of security for investors, acting as a buffer against potential market volatility. However, it's important to note that geopolitical uncertainties and inflationary pressures still pose risks, and the market's performance will heavily depend on how these factors evolve.

The UK construction industry is also set to contribute to the property market's resilience. With infrastructure leading the way, expectations for increased workloads over the next year are high. Government planning reforms and private sector development initiatives are likely to bolster activity in both residential and commercial construction, supporting long-term market growth.

It’s pleasing to see that the overall outlook for the UK commercial property market is positive, despite all the challenges outlined above. For investors, the key will be to remain vigilant, stay informed about market trends, and focus on sectors that offer resilience and strong fundamentals; but ultimately, the commercial property market remains an attractive and reliable asset class for those seeking long- term, stable returns.