London's commercial property market has weathered significant challenges over the past 18 months, witnessing slow growth in capital values. However, a brighter outlook could be on the horizon for 2024, as various factors in Q1 signal a potential turning point for the sector.
Anticipated improvements in investment activity are fuelled by interest rate cuts, lower inflation, and enhanced debt financing opportunities. Colliers’ Real Estate Investment Forecast anticipates forthcoming changes:
- Across the board, capital values are expected to rise, with Central London high street shops and London industrial units poised for the strongest growth.
- Total returns are forecasted to increase by a notable 10.2% in 2024.
- Rental growth is expected to be sustained across all major sectors.
Economic conditions play a key role in shaping the trajectory of the commercial property market, with many investors keenly awaiting updates on inflation. Experts predict that CPI inflation is likely to dip below the Bank of England's 2% target by April, driven by favourable base effects and anticipated decreases in utility prices. While some forecasts indicate a temporary drop in CPI inflation to below 1% in the latter half of the year, the Bank of England remains cautiously optimistic, forecasting inflation to settle around 2.75% by the end of 2024.
Interest rates – a critical factor influencing investment decisions – have remained steady at 5.25%, maintaining stability amidst economic fluctuations. However, speculation looms regarding potential rate cuts, with expectations mounting for the first cut-rate around the middle of the year. Financial markets have adjusted their forecasts accordingly, anticipating a year-end rate of approximately 4.5%, up from previous estimates of 4.0%.
Return of capital growth to London
Retail units present an attractive option in the evolving landscape. Forecasts suggest greater activity driven by high yields and stable income returns, value-add opportunities within the retail market and scope for capital growth. While retail equivalent yields are currently in flux, stabilisation is projected by mid-year, followed by compression in certain sectors. By the end of 2024, all retail yields are expected to decline to 6.66%, paving the way for continued compression to 6.38% by 2025.
Stable capital market dynamics
Capital market dynamics reflect shifting investment volumes, with a noticeable increase from £2.1bn in Q3 to £2.8bn in Q4 2023. However, figures remain below the five-year quarterly average, indicative of cautious investor sentiment. Despite offices maintaining their attractiveness, comprising 26% of all investment activity in 2024, total London office investment turnover for the year falls short of historical averages. However, prime yields remain stable across key London markets, demonstrating the London market's resilience in economic uncertainties.
Strong demand for office space
Occupier market trends indicate a resurgence in London's occupational take-up, reaching its highest quarterly figure in two years during Q4. Notable pre-lets to major entities contribute to this increase, with total 2023 take-up slightly below the 10-year average. Strong demand for office space drives down vacancy rates to their lowest levels since Q1 2022, with increased speculative deliveries in 2024. Prime rents in coveted areas like the West End and the City continue to climb, reflecting sustained demand and market confidence. In the current market, strategic investments are key to capitalising on emerging trends and unlocking future growth potential.
Comments from Winkworth
Commenting, Adam Stackhouse, Managing Director of Developments and Commercial Investments at Winkworth said, “The 2024 commercial property market has started extremely well with a significant ‘jump’ in deal-flow and the emergence of a very balanced trading platform as fatigued investors ‘off-load’ surplus stock to hungry investors identifying this as potentially the bottom of the market cycle for values.”
He added, “We have seen exceptional demand for mixed use buildings that present useful tax breaks for investors, and the take-up of retail and small-medium sized office leasing deals has been equally strong. The market is characterised by new investors to the sector and the appetite to trade is very much back in play.”
In addition to assisting clients in finding commercial properties for purchase, the Winkworth Commercial team can facilitate connections with a range of commercial properties available for lease throughout London Zones 1 – 6. Our team of local specialists collaborates closely with both landlords and retained occupiers, covering the market to deliver attractive lease terms that offer steady income and support future business prospects. Moreover, the team offers Development and Investment Consultancy services which anyone seeking to start or invest in a business would benefit from. For any inquiries, please get in touch with Winkworth Commercial at +44 (0) 20 7355 0285.
