UK commercial property values set for new year decline

UK commercial property values and rents are predicted to “tumble off a cliff edge” in the first quarter of 2023, as estate agents warn offices will fare worst as prices fall.

A survey of more than 400 commercial agents forecast a 2.9 per cent decrease in prices per square foot across the sector in the first three months of the year, with offices falling 3.1 per cent.

The report, compiled by London-based firm Robert Irving Burns, said the “decidedly negative” outlook would mean “values and rents tumble off a cliff edge”, in the sharpest quarterly drop in the past five years of comparable data.

RIB managing director Antony Antoniou said the deterioration was due to a mix of factors including rising interest rates and the fallout of Liz Truss’s ill-fated “mini” Budget, which triggered a pause in transactions and a pullback in lending.

“Where we saw the market stop still, we will see the market finding its level, people working out where things are, where value is,” he said.

That made for a “grim” picture for sellers, he said, but a recovery in transactions, citing open-ended property funds needing to sell stock on the back of investor redemptions.

Listed vehicles have already seen this valuation drop show up in their share prices, with real estate investment trusts such as Land Securities and British Land falling by a fifth or more this year.

Offices are expected to suffer the biggest falls in sale prices, according to the RIB report, with nearly a third of respondents expecting them to come down by more than 5 per cent.

“Work from home is causing tenants to consider reducing space,” said one respondent. Another commented that “occupiers are more inclined to sign on for shorter lease terms”.

Regional and older buildings that do not meet new environmental standards are expected to particularly suffer, while luxury offices should fare better, agents expected. “We are seeing more people wanting their own standalone offices in central London than we have in the past,” said Antoniou.

The survey also predicted a 1.3 per cent fall in rents per square foot over the period, with retail expected to do worst with a 2.1 per cent fall. “In the restaurant and pub market, we expect to see significant business failures after Christmas, and these properties could be very difficult to re-let,” said one estate agent replying to the survey.

Antoniou said there was “significant pressure in retail, particularly in secondary locations”, adding that the sector was surviving the online challenge best in areas that offered experiences other than shops to attract footfall.