LONDON — The UK’s commercial property market is beginning to show signs of recovery following a significant downturn caused by the pandemic. However, this revival is taking place amidst a backdrop of lower property prices, raising questions about the market’s potential trajectory.
High-profile office properties currently on the market will play a crucial role in determining both the floor price for assets and the pace of recovery in UK deal volumes, particularly in the beleaguered office sector. This situation may also offer insights into the future of commercial property markets in other countries that are still grappling with similar challenges.
A notable example is real estate investor Nuveen, which has listed a 21-storey office tower in the City of London, commonly referred to as the “Can of Ham” due to its unique rounded design. The tower, completed in 2019, is priced at £322 million ($419 million), significantly less than the £400 million it sought in 2022, according to sources familiar with the sale.
Meanwhile, Canada’s Brookfield is aiming for approximately £500 million for its Citypoint tower, which is a sharp decline from its previous valuation of £670 million and its sale price of £560 million in 2016.
Despite these declines, demand for new office buildings remains strong. M&G Real Estate reports that its new office towers at 40 Leadenhall are over 80% leased. However, a recent inspection revealed that to attract tenants, the property features must evolve. The building includes amenities such as saunas, treatment rooms, a hair salon, a yoga room, a Peloton fitness suite, a cinema room, and a library, most of which are exclusive to office tenants.
“We believed tenants would prefer upgraded spaces,” stated Martin Towns, Deputy Global Head of M&G Real Estate. He noted that many older office buildings may need to be repurposed for residential use or demolished entirely.
The COVID-19 pandemic severely impacted global commercial property markets, leading to soaring inflation and financing costs while prompting a shift to hybrid and remote work. This transformation has caused many tenants to seek less space but with improved quality.
According to construction consultancy Turner & Townsend, the cost of constructing premium offices in London has increased to over £500 per square foot, up from less than £400 before the pandemic. This increase is attributed to inflation and the demand for enhanced amenities and sustainability features.
While some properties, particularly older ones located outside city centers, remain difficult to sell, there is optimism regarding prime offices, rental housing, and logistics investments. The global decline in inflation and interest rates is gradually reducing financing costs, making these properties more appealing relative to other investments.
“There is a noticeable shift in sentiment within the UK,” remarked James Seppala, Head of Real Estate for Europe at Blackstone, the world’s largest commercial property investor. “Activity levels are increasing, and more investors are emerging from the sidelines.”
UK Commercial Property Shows Signs of Recovery
Despite the challenges, UK commercial property sales have shown a 26% annual rebound in the second quarter, according to MSCI data. This increase stands in contrast to declines of 45% and 22% in France and Germany, respectively. Furthermore, UK commercial property prices are projected to rise by 2% this year, even as prices continue to fall in the eurozone and the United States. Analysts from Capital Economics suggest that the UK market will outperform other Western markets over the next four years.
However, the office sector lags behind in recovery. Office sale volumes have dropped by 21% so far this year, according to MSCI, with no transactions exceeding £100 million in the first half of the year—a first since 1999. Overall, London’s office vacancy rates have risen to 10.1%, the highest in over 20 years, with rates in the Docklands area nearing 17%. The Canary Wharf Group is considering converting some vacant spaces into hotels to address this issue.
Adjustments in the Market
Industry insiders indicate that sellers are gradually coming to terms with the reality of lower property prices, often spurred by high refinancing costs. Some may feel pressured to sell, while foreign buyers are expected to remain active in the market.
“Many investors view the UK as an attractive investment destination due to its stable political climate and are eager to enter before prices increase,” said Fiona Voon, Head of Real Estate Capital Markets UK at BNP Paribas.
Domestic investors, such as Schroders, are also gearing up to invest hundreds of millions in UK commercial properties this year and next, with a focus on prime office spaces. The asset manager noted increased interest from investors based in the Middle East, Asia, and Australia.
“Offices have become somewhat stigmatized recently,” stated Nick Montgomery, Global Head of Real Estate at Schroders. “However, from our perspective, this presents an opportunity rather than a risk. Historically, the market tends to overcorrect.”
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