Commercial real estate investment

2024 was a challenging year for the commercial real estate investment market, with transaction volumes remaining subdued and unlikely to surpass £40 billion.

Although this figure is a little ahead of the £37 billion transacted in 2023, it is well below the circa £60 billion per annum transacted during the five years prior to the pandemic.

However, performance moved in a positive direction in 2024, as all-property yields levelled off following the correction that started in mid-2022 (although yields are still moving upwards in some parts of the market). Average rental value growth has been circa 3.7% in 2024, comfortably exceeding CPI inflation. This was driven by industrials, but encouragingly, growth was also positive at the all-retail and all-office levels. As a result, all-property capital values were broadly stable, which should mean a total return on the MSCI index of more than 5% for the year - a welcome outcome following two years of negative returns.

Market sentiment has improved following November’s base rate cut and budget statement. Consumer price inflation has been within 60 basis points of the Bank of England’s 2% target since April 2024, and whilst most forecasters expect CPI to be a little above target during 2025, it should remain below the 3% threshold for triggering a letter of explanation to the Chancellor.

Against this backdrop, the prospect of further base rate cuts is clear, although uncertainties remain around the pace at which this occurs. We expect investor sentiment to improve further during 2025, and many investors will now be readying themselves for increased opportunities. Indeed, we have already seen an uptick in activity, particularly in sectors such as industrial, retail warehousing, and the living sectors, with portfolios and larger lot sizes now coming to the market.

Overseas investors remain active, particularly for trophy assets and in high-growth sectors. Meanwhile, domestic investors are increasingly focused on value-add opportunities and the repositioning and repurposing of secondary assets. The trend towards investor diversification away from the traditional retail, office and industrial sectors will continue, given the significant opportunities presenting themselves in sectors such as Build to Rent residential, later living, and infrastructure.

ESG will remain a key driver for capital allocation. While stringent, the UK’s regulatory environment offers clarity, and the government’s commitment to decarbonisation aligns with the investment priorities of many investors. This intersection of policy and market demand creates opportunities for green financing and the retrofitting of older assets, offering attractive yields for investors. However, with the 2027 MEES deadline fast approaching for commercial buildings to achieve a minimum EPC rating of C, the focus for occupational demand will remain firmly on sustainable EPC A- and B-rated assets in strong locations.

The significant level of debt financing that occurred pre-pandemic means that a substantial volume of commercial property loans will mature in 2025. This should allow for refinancing opportunities and may also create opportunities to acquire property at lower valuations, as well as the provision of alternative funding solutions.

Overall, we anticipate an uptick in investment transaction volumes in 2025. Reducing interest rates should allow room for a modest downward shift in property yields – though not across the board – with further potential for yields to sharpen as investor competition increases.

The occupational markets will continue to be resilient, with positive rental growth at the all-office, retail and industrial level (though not across all assets and quality ranges). Given the potential for some downward yield movement, the total all-property return should accelerate to 8-9% in 2025, which would represent the highest figure since 2021. Once again, we think industrials should outperform the all-property average, with an expected total return of circa 10%.