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.
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.
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UK commercial real estate prices have fallen more than 15 per cent since June 2022, according to an index compiled by property agency CBRE, and most analysts expect them to keep falling in the near term.
Meanwhile, many investors have pulled back entirely while the market adjusts to higher rates, and the data from CoStar suggest that the desire to transact has gradually ebbed away over the course of the past 12 months.
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.
But roughly 80 per cent of the £18bn in office investment came in the first six months of the year, with a handful of major deals for trophy assets struck in the first few weeks of 2022.
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.
Across the board, dealmaking was already slowing when Liz Truss and Kwasi Kwarteng, the former prime minister and chancellor, unveiled their “mini” Budget in September last year.
But their tax-cutting intervention sowed more uncertainty and was widely cited by investors as another reason to retreat.
Grant Lonsdale, director of market analytics at CoStar, said that dealmaking was likely to remain slow in the next few months. But, he added, “stabilising prices together with more clarity over interest rates and the economic outlook should stimulate activity in the second half of 2023.”