Over the past decade, the UK commercial property market has seen a continued period of sustained growth. However, whilst recent events have had a significant impact on the UK economy, they have also shaken belief in many traditional and emerging asset classes, including throwing the future of commercial property into some doubt.

Whilst there is still some uncertainty moving into 2023, we are starting to see the major players predict a boom in investment for the UK commercial real estate sector.

We have taken the time to highlight some of the key commercial property considerations to carry with you into 2023:

Global price corrections

The first sign of prices shifting has been an expansion in yields or capitalisation rates, commonly known as cap rates in the sector.

“There definitely has been upward pressure on yields around the globe, and we have seen this in the UK for several years. Whilst a price correction was already underway in the shopping centre sector before the emergence of COVID-19, this was exacerbated through the upheavals of the pandemic period. Some investors have said that the sector has now been oversold, and they have a strong point to argue."

But signs of a correction are emerging across commercial real estate classes more broadly, even for those with low vacancy levels and high rental growth.

“Now we’re seeing this across the board, even within the highest performing asset classes such as industrial and logistics. Looking to 2023 as a whole, it’s likely we will see an increase in transactional activity, which will take place in the second half of the year as pricing stabilises”.

Whilst there is a “seesaw of sentiment” across the sector, recent comments by the likes of Colliers and CBRE also paint a picture of a market rebound, as inflationary pressures pass and monetary policy pivots towards neutral, if the economy can prove to be resilient.

Continued belief in the sector

With this in mind, the UK has a long history of investing in commercial property. Investments in the sector are expected to grow by 15% in 2023, and more than £300 billion is expected to be invested over the next five years. These forecasts are supported by an increase in supply of development funding, which bodes well for investors and developers alike.

Investors in commercial property are likely to be affected by the initial impact of a downturn. It’s worth remembering that commercial property is a long-term investment, so it may take some time before any potential benefits become apparent. However, there are also lessons that can be learned from previous market downturns, one being that buying at the bottom of the market can lead to substantial returns when prices recover. However this is much easier said than done.

Increased investment from overseas

Overseas investors are confident in commercial real estate, with more than £400 million having been invested in commercial property since the end of 2019, according to a report from CBRE. This trend has continued during the emergence of COVID-19, recent inflationary pressures and multiple interest rate hikes.

In the coming years—it is predicted that overseas investment activity will have a significant market share of the sector, which could present new risks and challenges moving forward, due to local and global externalities having impacts on the sector long term.

A potential ‘Green Boom’

One major reason for the expected boom is the UK’s highly anticipated ‘green agenda’. The government has set an ambitious target to reduce carbon emissions by 80% by 2050—and this will have a direct impact on commercial real estate.

The green agenda is good for investors, as it boosts returns and lowers risk in commercial real estate investment. Investors here can benefit from Capital Allowances, such as Annual Investment Allowances and the 130% Super Deduction, which allows property owners to offset their investment losses against other income. This means that if you were to buy an office building with low rental yield but high capital growth potential, you could claim tax relief on that expenditure. This is often a significant windfall for our clients overall tax position.

Changing Debt Markets

Whilst increased interest rates and economic uncertainty has been at the forefront of market discourse for some time, we have seen the appetite for borrowing decrease over the past 12 months. However as the debt market returns to a neutral state in 2023, we may start to see financing increase for new assets and investment.

As we have seen in recent years, there will be a continued flight to quality and greater scrutiny of income streams to service higher debt costs. Thus, alternative lenders will secure attractive risk-adjusted deals by virtue of their more flexible underwriting processes and risk analysis, compared to traditional providers of finance.

A long-term outlook

The past 18 months have not been easy for investors and owners. Having a long-term strategy and maintaining a disciplined approach that focuses on investors’ objectives will remain key.

Moreover, while much of our focus has been on European risks, we have seen signs of slowing economic activity elsewhere including China (with growth at its slowest pace since 2009), India (slowing down after nine consecutive quarters at 7%+).

It’s important to remember that many of these impacts are global and have impacted other traditional investments, as well as emerging assets. The commercial real estate sector has proved resilient and continues to remain an attractive investment due to stable returns when compared to other asset classes over recent years

HMA Tax (International) Ltd