There are optimistic signs, says Shawbrook Bank. Their data on the commercial property market shows a rebound, with lower borrowing costs and a stronger market performance in some key areas, such as heavy industry.
Shawbrook’s latest internal data shows that a 102% year-on-year increase in the proportion of lending was allocated specifically to commercial property purchases between 2023 and 2024.
The increase has been especially notable in the Southeast, says the Bank, a region which accounts for 30% of the total commercial purchase lending. This region remains popular with investors due to its proximity to the capital, strong transport links, steady economic growth, and high demand.
But in this economic environment things can change quickly. The data from the second half of 2024 could easily give a different picture following a long gestation period since the election, and a shock budget for businesses.
The growth in lending Shawbrook sees aligns with a recent trend for commercial property investors to diversify their portfolios from retail and office towards industrial. Shawbrook’s data also reveals that semi-commercial applications (HMOs, Mixed Use) have also risen, growing from 13% in 2023 to 24% in 2024, indicating a shift towards higher-yielding asset classes.
To meet this demand, Shawbrook recently enhanced its commercial investment product offering and raised the maximum LTV for retail, healthcare, education, and industrial assets, supporting those investors with diverse portfolios.
Daryl Norkett, director of real estate proposition at Shawbrook, commented:
“The commercial property market is recovering after a turbulent period, with several sectors showing renewed signs of growth. Investors are keen to expand and diversify their portfolios with high-yield, high-income properties like commercial, semi-commercial, and HMOs.
“These assets not only offer potentially higher returns, but diversification can also help to build resilient portfolios even in uncertain markets. However, investors should conduct thorough research, as risk profiles can vary significantly across regions and asset types. Speaking with a specialist commercial broker can provide invaluable guidance on the best options available."
Despite Shawbrook’s optimism, from the moment an election date was announced earlier this year, UK businesses and property investors have been kept in a state of suspense. The suspense was heightened somewhat more recently with gloomy comments ahead of the new government’s Autumn Budget.
The commercial property market especially has been on hold over that period. Whilst some transactions have continued to be made, the numbers are down considerably over those achieved as the market was improving until the summer of 2024.
The government has now delivered its first budget containing measures that have shocked many people in businesses up and down the country, and the full implications of these substantial changes being introduced are still being assessed.
There is a huge question hanging over the effect the budget will have on the commercial property market, especially if the promised growth fails to materialise over the coming months.
High Street retailers in particular, but also commercial property owners in the manufacturing, distribution, professional services and the leisure sectors will be affected to a greater or lesser extent by the changes to national insurance paid by employers.
The massive amount of extra borrowing the government is planning will potentially keep interest rates relatively high and the other budget measures will likely raise inflation and unemployment.
A turnaround in interest rates, a potential rise that would have a direct effect on new funding for commercial property loans (mortgages). It will have a direct impact on the viability of new schemes of commercial property development and refurbishment projects.
On the other hand, an influx of investment in housing and infrastructure could boost the economy, though the promise of thousands of green jobs being created has yet to materialise.
Experts in the commercial property market see a levelling off in investments until the New Year when the promised government investment in infrastructure projects just might result in a steady stream of commercial premises coming onto the market. It is then though when some less viable businesses decide to cut back or cease trading altogether.
Increased staffing costs through the increase in the minimum wage and employers’ National Insurance contributions (NICs) will weigh heavily on some businesses, particularly those that are just about surviving.
Creative destruction is an economic tenet that refers to the process of change that replaces outdated economic structures, less viable businesses and poorly run companies with new ones. The concept was introduced by Austrian-American economist and political scientist Joseph Schumpeter in his book Capitalism, Socialism and Democracy.
So, driving out the old and bringing in the new is not always a bad thing as businesses learn to re-set their operations to cope with a new environment, they of necessity become more efficient.
From property agents’ and banker’s points of view such churn could create more business than they’ve had for a long time, and it creates opportunities for savvy investors.
Reacting to the Budget, retailers in particular are showing their dissatisfaction with the latest moves by government. In the letter to the Chancellor, the British Retail Consortium (BRC) claims that changes being imposed on the industry next year: the higher Nation Insurance bills, the National Living Wage increase along with packaging levy increases, will make unemployment, job losses and higher prices in retail inevitable. It says the cost to retailers is an additional £7bn in total.
Eighty plus mainline retailers have signed the letter that says:
“For any retailer, large or small, it will not be possible to absorb such significant cost increases over such a short timescale. The effect will be to increase inflation, slow pay growth, cause shop closures and reduce jobs, especially at the entry level. This will impact high streets and customers right across the country.”
It shows there's growing dissatisfaction with business leaders and their views on the new government. During the election campaign, Labour had made promises and had sought to position itself as a pro-business party.
There is at least some good news for business tenants in the budget. Business rates relief is being extended temporarily and there is to be a major review of the business rating system next year.
Rents have also stabilised at a lower level than before with valuations down across the board on rent reviews. According to real estate market analysis specialists, Statista, the industrial sector will see its highest annualised rental growth figures in the UK between 2024 and 2028.
That boost will be followed by London West End office space, says the consultancy. Industrial real estate rents are expected to grow by 3.2 percent per year in this period, while West End office space rents are expected to increase by 2.7 percent. When it comes to average total commercial real estate rates in the UK, this they forecast will settle at around 2.2 percent.
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