Commercial Property Surges as Investors See Opportunities

The UK’s commercial property sector soared last year with investment 28% higher than 2023 levels. This is despite broader economic uncertainties and slower than hoped for interest rate reductions.

The interest in UK commercial real estate is being driven by several factors that have aligned to create compelling opportunities for both domestic and international investors.

The data from Rightmove’s quarterly commercial insights tracker, also highlights interest surging in a couple of property sub sectors. Most notably, the industrial sector led the way with strong demand driven from online shopping and e-commerce operators. Their need for more warehouse and logistic space, meant this sector returned a massive 72% increase on 2023. This standout performance shows the need for robust supply chain infrastructure and last-mile delivery facilities in urban hubs. Both investors and owner-occupiers are competing aggressively for these well-located assets.

The return-to-work movement is driving office demand.

Coming in behind the industrial and logistics sector is the office sector which saw demand up 57% from 2023. This demand is driven in part by the return to office working post pandemic but also the adjustment in property valuations following the pandemic. Many prime commercial assets are now trading at much lower prices compared to historical levels, creating what many investors view as a buying opportunity. This correction has particularly affected office and retail properties, allowing investors to acquire quality assets in prime locations at favourable entry points.

International investors, especially those from Asia and the Middle East, have been particularly active in the UK market. The relative weakness of sterling against major currencies has effectively created a currency discount for foreign buyers, enhancing their purchasing power. Additionally, the UK’s transparent legal system, strong property rights, and established market practices continue to make it an attractive destination for global capital.

Other sectors getting traction include data centres, care homes, and student accommodation, due to their defensive characteristics and potential for stable, long-term returns. These sectors often benefit from structural growth trends that transcend traditional economic cycles.

The hunt for higher yield

The UK government’s focus on regional development, particularly through the “Levelling Up” agenda, has sparked interest in commercial properties beyond London. Cities like Manchester, Birmingham, and Leeds are seeing increased investment activity as investors search for the highest yields.

However, investors remain selective, focusing on quality assets that demonstrate resilience to economic headwinds and align with evolving occupier demands. This flight to quality, combined with the structural shifts in how commercial property is used, is likely to shape investment patterns in the coming years.

Overall, as interest rates continue to fall, we should see further activity and greater confidence in commercial property assets after what has been a tough few years for the sector, and likely more interest from both domestic and international investors.

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