Commercial Property Landlords Caught Between a Rock and a Hard Place

Commercial property deals have collapsed to their lowest level in more than a decade as investors reckon with higher interest rates, the prospect of a lengthy recession and the fallout from the Liz Truss “mini” Budget. The £7bn of deals transacted in the final three months of last year was the lowest quarterly total since at least 2010, according to real estate analytics company CoStar, which started collecting data that year.

The £7bn of deals transacted in the final three months of last year was the lowest quarterly total since at least 2010, according to real estate analytics company CoStar, which started collecting data that year.

Investors spent £21bn on UK commercial property in the first three months of 2022, £17bn in the second quarter and £11bn in the third.

Commercial property landlords have suffered as interest rates have risen: investors now have to bear far higher borrowing costs and are unwilling to pay 2021 prices and service operations.

UK commercial real estate prices have plummeted since June 2022, dropping a whopping 15 per cent or more according to CBRE data. Unfortunately for investors and property owners alike, it looks like these dips are here to stay in the near future.

After increasing interest rates, investors have scaled back significantly and the desire to buy or sell has been on a steady decline for the past year, according to CoStar data.

The lowly investment figures for the fourth quarter stand in stark contrast to early 2022, when commercial property estate agents were toasting the best start to a year since 2015 and looking forward to a period when overseas investors — particularly those from Asia — could once again travel freely.

But hopes that post-Covid spending would be unleashed on the UK have been dashed since Russia’s invasion of Ukraine in February last year.

The war accelerated inflation around the world and encouraged central banks including the Bank of England to raise interest rates far faster than expected, as well as increasing the prospect of a lengthy recession in the UK.

Of the £56bn invested into UK commercial property through the year, around a third was spent on offices, with Asian investors particularly active according to CoStar.

The UK’s office investment skyrocketed at the beginning of 2022, with £18bn injected in just six months. Major deals for prestigious properties were sealed quickly and effectively to kick off a promising year.

There was also £13bn spent on warehouses, as investors bet that structural trends including the growth in ecommerce and a greater emphasis on stockpiling from companies caught short by the pandemic would inflate values.

That market has been hit hard by rising rates and signs that the runaway growth of the biggest ecommerce operators, such as Amazon, is going into reverse.