Investment volumes in commercial real estate to fall by a third in 2023

BNP Paribas Real Estate has shared its prediction for total UK commercial real estate (CRE) investment volumes into 2024.

Following the £18.5 billion spent on UK CRE in H1 2023, which is less than half the volume compared to the same period last year, the firm expects total volumes to reach £41bn this year – down a third both on last year and the long run average – before rising 15% to £47 billion by close 2024.

The peak Bank Rate – which BNP Paribas Real Estate anticipates could reach 5.50% – with an outside chance on another 25bps to 5.75% by year end – will keep investors on the sidelines as they refrain from decision-making in volatile conditions. BNP Paribas Real Estate expects rate cuts to arrive in the second quarter of next year, which will bring some marginal improvement to the market, however, suggests that many investors will still be tempted into waiting for borrowing costs to fall further before acting.

Vanessa Hale, head of research and insights at BNP Paribas Real Estate commented: “The impact of an ever rising base rate on real estate transactions has been stark, with the first half of the year failing to deliver a meaningful recovery for the UK CRE market. However, there is more activity coming through, albeit slowly, and investors are now very sensitive to data releases so any momentum remains complex.”

“Inflation figures recently published all-but confirmed that the Bank of England will do more to bring inflation back to target. A 25bps hike to 5.50% in September now looks certain, and there’s a meaningful chance of another increase before the end of the year.

Hale continued, “While inflation continues to restrain activity, the market should be encouraged by the lack of distressed assets coming through. Lenders are clearly reluctant to call in badly performing loans that would require asset sales while conditions are tough. Healthier balance sheets and resilient rental growth in key sectors and locations is keeping covenant breaches relatively low.

“That said, the reprieve in borrowing costs that we’ve seen in recent weeks has likely come too late for a small number of owners. The Bank of England’s latest survey of lenders suggested that the availability of debt will worsen over the short term. Institutions, though not distressed, are also likely to remain net sellers for the time being. Well capitalised private investors are in a fantastic position to build portfolios for the next cycle.”

BNP Paribas Real Estate’s analysis of investment trends during the first half of 2023 reveals:

Prime retail assets are now in high demand, with investment in traditional West End locations in London reaching £810m

Assets, specifically those in the office sector, which demonstrate the very best ESG credentials, continue the flight to quality momentum and attract tenants such as law firms, which totalled over 500,000 sq ft, accounting to an 11.5% share of total central London take-up in H1 2023. This demand for best-in-class space continues to apply upwards pressure on prime central London office rents

Industrial investment volumes fell 63% y/y in H1, but capital values fell c. 25% in the year to Q2 2023, yield shift has slowed considerably and prime yields have been flat since the start of the year after rebasing c. 150 bps higher since Q1 last year. With rental growth forecast to remain positive, investors continue to see value in the sector’s long-term structural trends

Living sectors continue to attract investment as the demographic and affordability challenges continue