(Commonwealth) _ The influx of funds into the UK’s commercial property sector experienced a downturn across all segments, notably in industrial, office, and retail sectors, as detailed by market analysis conducted by Sirius Property Finance, specialists in debt advisory. Office values, particularly secondary ones, witnessed a decline due to the impact of hybrid working models and concerns over potential obsolescence, notably low energy efficiency ratings. Despite subdued commercial property investments in Q1 2023, a brighter outlook emerges for prime office spaces and the industrial sector, as per MSCI and RICS’s commercial property monitor. However, RICS reports a sector in decline, grappling with increased borrowing costs and a sluggish UK economic growth forecast. This predicament notably affects demand in secondary offices and retail segments, signaling ongoing challenges for these markets.
Nonetheless, the latest RICS survey paints a slightly more optimistic picture compared to the previous quarter. While most respondents still view the market in a downturn, a growing number perceive conditions as stabilizing or showing signs of improvement. In their independent analysis, Sirius Property Finance scrutinized the past six months of commercial property investments. Their findings showcase a substantial decline in industrial investment by 55%, amounting to £2.9bn compared to the previous £6.9bn. Office space investments faced a similar downturn, decreasing by 55%, with a significant drop of 63% observed outside central London, yet maintaining the highest total investment at £3.8bn. The retail and leisure segment also experienced a 45% decline. This decline stemmed from a substantial drop of 75% in shopping center investments, closely followed by a 74% decrease in leisure investments.
Transactions across sectors saw a decline, notably in offices by 44%, with a substantial drop of 64% in central London transactions. Retail and leisure transactions also fell by 40%, with shop units experiencing a severe decline of 47%. Industrial transactions witnessed a decrease of 35%. Moreover, the average investment per transaction exhibited a decline across sectors. Industrial investments saw the most substantial drop by 35%, reducing from £22m to £14.3m per transaction. Office space investments decreased by 19%, while retail and leisure witnessed an 8% decline. However, the latter was buoyed by a remarkable 194% increase in the average transaction amount for shop units, rising from £5.4m to £15.9m in the last six months.
Kimberley Gates, Sirius Property Finance’s head of corporate partnerships, highlighted the challenging period faced by the commercial sector. She emphasized the sector’s struggle since the pandemic’s onset and the subsequent shift from town and city centers. Economic uncertainties further exacerbate the situation. Looking ahead, Gates emphasizes the necessity for a contemporary approach to space utilization. While industrial units are expected to regain strength due to the prominence of e-commerce, retail and office spaces need adaptation to modern sensibilities. Mixed-use spaces and experiential retail concepts akin to successful models like Barnes & Noble in the US and Sephora across mainland Europe could pave the way forward.
Meanwhile, RICS’ senior economist Tarrant Parsons noted a cautiously optimistic sentiment. Although the commercial property market remains subdued due to higher interest rates and economic uncertainty, there’s a suggestion that the toughest phase might have passed. Industrial assets showcased positive capital value expectations, backed by robust occupier conditions. Additionally, alternative sectors like aged care facilities, life sciences, data centers, and student housing exhibit resilience, while secondary office and retail properties continue to struggle. Tenant demand, according to RICS, showed a significant improvement from -20% in Q4 2022 to -3% in Q1 2023. Industrial sectors experienced a boost in occupier demand, rising to a net balance of 16% from 6% in Q4 2022.
