Investment volumes into UK commercial property to reach five year high of £65billion in 2022 – Colliers forecasts

Colliers International UK chief economist Walter Boettcher.

Overseas investors and pent-up demand and supply will push investment into commercial property to reach £65 billion in 2022, a five year high according to Colliers’ predictions for the year ahead. Other key trends include the office occupancy rate stabilising at a new norm of 75 per cent; industrial take up exceeding 40 million sq ft for units over 100,000 sq ft; continuing steady demand for supermarkets and retail warehouses and, above all, a heightened focus on ESG.

Pent up demand from overseas investors will help drive the investment market in 2022, alongside an intensifying international search for yield and/or income security, as well as releases of stock previously withheld from the market due to uncertainty. The greater levels of UK economic and financial stability in 2022 will help stimulate investment notes Colliers.

Walter Boettcher, Head of Research & Economics at Colliers, comments: “This year we will see continued GDP recovery, but a disappointing Q1 with business uncertainty linked to pandemic and new uncertainties in UK/EU relations given the recent resignation of Lord Frost. Likewise, uncertainties will linger about the unpredictable global monetary policy responses to inflation. The risk of policy mis-steps is high. We expect UK CPI inflation to peak at around 6 per cent in Q1 2022, then fall dramatically in May/June spurring stronger investor sentiment. Inflation will be sub-3% by mid Q4 2022. Look for a strong investment surge in H2.

“Taking a look across the board, UK commercial property pricing will remain stable with further yield compression expected in prime long income market segments including London, regional offices and UK wide logistics. Retail yields will stabilise further with the exception of obsolete shopping centres.”

The underutilisation of office space will remain a feature of the market this year as occupiers continue to assess future requirements, and occupancy levels will also depend on the trajectory of future Covid variants. Colliers predicts that an office occupancy rate of 75 per cent looks likely to be the norm for 2022. Despite uncertainty, pricing on the best quality refurbs, premium and trophy stock will see healthy uplifts. Further yield compression is likely for prime assets. Occupier appetite will drive headline rental growth and generate keen competition between domestic and cross-border investors, especially as travel restrictions are eased for long-haul travellers.

Take-up of large distribution warehouses of 100,000 sq ft+ will exceed 40 million sq ft in an undersupplied market in 2022 states Colliers. Demand for new warehouses will remain elevated, driven by the provision of new space for e-commerce, but also for global occupiers working to decrease their carbon footprints. Rents will continue to rise strongly, pushed by a landlord-favourable supply/demand imbalance, increasing land values and inflationary pressures on construction costs.

Colliers forecasts that retail warehousing will continue its ‘bull’ run in 2022. Yields will not see the dramatic sharpening as in 2021, but depth of investor demand will be maintained across prime and secondary assets. Supermarket demand will be maintained. Like retail warehouses, yield compression will be more subdued than in 2021, but appetite will remain strong. With major investors still seeking stores and given limited opportunities, a great focus will be on secondary stores, or those with open market value review patterns.

ESG considerations will continue to be top of the agenda for many sectors of the market. A corporate stampede to Net Zero will continue to change market conditions fundamentally. A two-tier occupational market will emerge in big cities with buildings showing Net Zero commitments, or established pathways towards it, more desirable and achieving higher rents than those that do not. The risk of increasing numbers of non-compliant ‘stranded assets’ will increase. Landlords will increasingly provide low carbon facilities/services/fit outs directly as pressure to commit and act on sustainability goals.