Commercial property investing 2024-2028

There are positive signals for the UK commercial property market, with lending expected to rise by 32 per cent by 2028.

Property law specialist Newmanor Law analyses emergent trends that could mean 2024 is a positive turning point for the commercial property market, while leading commercial lender Together also releases a report that estimates commercial property lending will rise by 32 per cent to £118 billion by 2028.

Challenges of the present

The economic landscape for commercial property has seen some changes. The rise of e-commerce, reducing footfall in retail stores and hybrid working reducing demand for office space (read our article discussing this here) has impacted the sector of late.

In addition, for roughly the past two years, mortgage rates have risen to be higher than they have been in 15 years.

Early signs that the Base Rate may edge down in 2024

With inflation slowly getting under control, albeit with a blip of 0.1 per cent in December, many economists are confident it’ll return to the Bank of England’s (BoE) target of 2 per cent by the end of the year, with some economists confident we’ll reach it by April – currently inflation is standing 4 per cent. This could provide the BoE with the justification to reduce the Base Rate.

According to Newmanor Law, this does not mean that the cost of borrowing will reduce in the near future – nor does it mean the Base Rate will return to the levels enjoyed between 2008 and 2021.

However, with commercial property prices having already reacted to the previous increase in interest rates, this would be a positive that should foster decent growth within the commercial property sector – and there may come a point where commercial property investments are believed to be under-valued.

Mat Oakley, Director of Commercial Research at real estate agent Savills, says

We believe that the factors that drove the recent collapse in commercial property values and confidence will all improve in 2024. However, as the storm surge of high inflation and interest rates recedes, some new (and old) rocks will be exposed to challenge investors in certain sectors.

When Oakley says ‘to challenge investors in certain sectors’, he may be referencing the rise in e-commerce that has seen less demand for retail stores, or the rise of hybrid working, which has reduced, at least in part, the demand for office space.

Within the commercial property sector, amongst the changes there are certainly new opportunities.

Emerging trends within the commercial property investing

As e-commerce has taken footfall away from traditional retail stores, the previous demand for high street shopping has shifted in part towards warehouse and logistics spaces.

Another trend that has emerged came after the United Kingdom left the European Union, after businesses realise they should reassess and bolster their supply chains. In response, companies are opting to maintain larger inventories, creating a sustained demand for commercial spaces.

While Newmanor Law believes this upturn in commercial property will evolve over the longer term, a leading commercial mortgage lender, Together, released a report that indicates that perhaps this increase in investment may be closer than we think.

Together: 2028 commercial property market outlook

The Together report forecasts a 32 per cent increase in total commercial lending from an estimated £90bn in 2023 to £118bn in 2028.

The report surveyed all types of property investors and found the following:

• 23 per cent of property investors are looking to diversify portfolios and expand into new sectors.
• 23 per cent of all property investors believe there is growing demand for the commercial sector.
• 16 per cent of those surveyed had already snapped up commercial property opportunities amidst lower purchase prices.

Development director of Together, Chris Baguley, said:

As we look at the UK commercial property landscape, the scope and diversity of the opportunities is impressive. Whether its student housing, housing/residential development or repurposing retail and other larger sites, the next few years are going to provide significant growth for the UK commercial property market. The optimism of the sector, combined with the economic recovery, mean those investors that are well poised with the right finance support will ultimately be in the best position to capitalise on these opportunities.

While not without challenges in 2024, the anticipation of increased lending, and a bullish appetite for growth suggest a resilient and adaptive commercial property market.

At specialist broker, Commercial Trust, reductions in commercial mortgage rates have already been seen, alongside a softening in buy to let rates. With the Base Rate holding at 5.25 percent, there may be more of the same to come, which investors can capitalise upon.