Savills is expecting strong growth to resume across the commercial property sector this year after years in the doldrums in the wake of the pandemic.
The property group told shareholders on Thursday that while ‘challenging’ macro conditions are expected to persist for some time, ‘most markets are in recovery’.
Savills said: ‘We expect re-financing driven activity, the sustainability agenda and the trend towards corporates requiring greater office attendance for staff, to continue to be positive for transaction volumes.’
It added that its 2024 performance was bolstered by its market share in commercial transactions.
So, what’s on the cards for commercial property this year?
A growing number of businesses, including JP Morgan, Lloyds Banking Group and Meta, are urging or compelling their workforce to be in the office more frequently or permanently.
However, the level of future demand for office space remains uncertain and the commercial property industry has endured a torrid time in recent years, as have investors with money tied up in it.
Share prices in the sector fell by around a third in 2022, but have since recovered some ground.
During and in the immediate aftermath of the pandemic, the commercial property sector was written off by many. To what extent has this outlook changed?
This is Money spoke to three experts to get their take on how the commercial property sector is likely to pan out this year.
Working from home crackdown looks bullish
Speaking to This is Money, Marcus Phayre-Mudge, a fund manager at TR Property Investment Trust, said: ‘The recovery in commercial real estate remains bumpy, but demand for high-quality buildings is outpacing supply across all sectors.
‘This even applies to much-maligned CBD offices, with vacancy rates for prime West End spaces hitting record lows of under 3 per cent.
‘This supply squeeze reflects the lack of post-pandemic development and a renewed recognition of the value of in-person collaboration for businesses.’
He added: ‘It has also been reported today that Citigroup faces a staggering £1billion bill to retrofit its ageing Canary Wharf skyscraper.
‘Ironically, this highlights the advantage held by owners of modern office buildings that attract employees, are in desirable postcodes, and already meet stricter environmental standards.
‘Listed property companies continue to face challenges. The new government’s Budget has not gone down well with markets, and borrowing costs look set to taper rather than tumble.
‘But the sentiment pendulum has probably swung too far toward miserableness.
‘The companies we invest in own in-demand properties and have manageable debt, making them well-equipped to weather higher-for-longer interest rates.’
Stranded asset risk?
Matthew Norris, manager of the VT Gravis UK Listed Property Fund, told This is Money: ‘The outlook for UK commercial property in 2025 is more positive than it has been for some time, and we have seen a marked increase in interest over the past three months or so from financial advisers and wealth managers looking to increase their allocation to the asset class.
Norris cautioned that ‘sticky inflation’ and interest rates staying higher for longer remain risks, but said ‘there are plenty of positives that make commercial property attractive’.
He added: ‘The most recent undershoot in UK economic growth and the unexpected slowdown in UK inflation to 25 per cent means that Bank of England interest rates are likely to be lower by the end of 2025.
‘Rents are growing – particularly in areas such as student accommodation – supply is limited, interest rates are coming down (albeit at a slower pace) and investor sentiment is improving.
‘And if you like commercial property, UK REITs are very much worth a look – they are trading on multi-year discounts to NAV. Couple this with 5 per cent yields and 5 per cent dividend growth forecast, the upside potential is significant.’
Turning to office space, Norris thinks environmental credentials could play a role in the viability of commercial premises.
Norris told This is Money: ‘When it comes to offices, I’m actually very picky and I agree with Savills that a large number of premises run the risk of becoming stranded assets.
‘Buildings have a large carbon footprint, and new offices can no longer be the energy-guzzling behemoths of the past. The most desirable offices in the UK tend to be modern offices in the West End of London, owned and developed by the likes of Derwent London.
‘In the UK, the government has set the Minimum Energy Efficiency Standard, measured by an Energy Performance Certificate which sets out the energy efficiency of a property with a rating from A to E.
‘The regulation requires all commercial buildings to be rated a minimum of B or higher by 2030.’
He added: ‘If regulation dictates buildings need to be more energy efficient, tenants want to be in buildings that are environmentally friendly, and workers want to be in buildings that have a high level of amenities – places to store their bikes, places to have a shower, etc – that’s good news for the landlords who produce, develop, and manage the next generation of green offices, with high EPC ratings.
‘But those buildings that are lowly rated run the risk of becoming unlettable – they become too expensive to upgrade to make them future proof, and then become unacceptable to tenants or unlawful to let.’
Interest rates are still key
Keith Bowman, an equity analyst at Interactive Investor,said: ‘Prospects for the property sector remain tough to call.
‘Hopes for further cuts in global interest rates deteriorated in late 2024 due to robust economic activity, largely in the US, and stubborn inflation. However, more recently, hopes have regained momentum given easing inflation both in the US and UK.
‘Shares broadly for the UK property sector over 2024 gave back gains made in 2023.
‘More specifically, Savills today in its latest trading update, flagged most markets as in recovery going into 2025. Major property REIT, Land Securities, back at its first half results to late September, pointed to stabilised property values and increased rent takes.
‘Dividend yields on many UK property companies remain attractive, with some investors likely taking the view that they are being paid to wait for a potential recovery whenever it may come.’
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