2024: more of the same but better?

8th January 2024

Published by EG on 08/01/24

Last year demonstrated the resilience of the commercial property auction market and its ability to facilitate transactions even in adverse economic conditions. Richard Auterac of Acuitus looks at what lies ahead for the sector this year.

January is a time for predictions but with the economic picture still unclear and a General Election now expected for the second half of the year, looking into 2024 with any certainty is not straightforward. The recent cuts in mortgage rates and some good retailer trading figures over Christmas will be of encouragement, but for commercial property investors the cost of finance remains high.

The inflation rate fell to 4.2% in November – ahead of expectations – and it will be interesting to see if this trend can be sustained. And, of course, everyone is waiting for a cut in interest rates. The expectation has been that this would come in the summer but that may be accelerated if other key econometrics continue to improve.

Amidst this uncertainty, the commercial property auction market has continued to be able to attract equity and deliver transactions within defined timescales. Last year, auction investors were active across all commercial property sectors in the UK and there was particular demand for assets which offered secure income or potential for conversion to residential. Continued portfolio restructuring triggered further sales by institutional owners and this has put investment-grade assets within the reach of many private investors for the first time.

A cut in interest rates may come too late for many asset owners who are struggling to refinance their holdings and we expect this to lead to an increase in asset sales in the first half of the year. Except for the best assets, lenders and their insolvency practitioners are dealing with the significant reduction in values since the loans were first taken out. 

Conversely, an eventual reduction in interest rates and greater certainty in the financial outlook will lead to a more congenial environment for investors and this will bring more liquidity into the market. The simplistic message to be taken from this is that the first half of the year may prove to be a more advantageous time to buy

Rather than being sector-specific, private investors have become generalists. They are looking to buy assets where a significant price correction has already taken place and – with a dose of good fortune and clever asset management – they should be able to uplift the capital value ultimately whilst benefitting from a high initial income yield in the meantime.

For our Commercial Property Auction Data (cPad) reports, we track a subset of commercial property auction sales which solely encompasses investment grade assets and income-producing property with development potential. The volume of transactions for this type of property in 2023 reflected the impact of the escalation of the Ukraine-Russia conflict; the cost-of-living crisis; and the September Budget of the previous year. This segment of investment in 2023 was just under £630m – down from £773m in 2022. However, we expect greater volumes this year as we move away from these seismic shocks and the sharp increases in the cost of finance that they produced.

Investors have adapted to live with the uncertainty over the past couple of years and have developed strategies accordingly. Fluctuations in market conditions over the next 12 months may test them further, but there will be more opportunity to rebalance portfolios and secure assets at attractive prices.

In this column 12 months ago, I commented: “Although commercial property has come under sustained pressure in 2022 so has every aspect of the financial and economic world. The tangibility of bricks and mortar is an important investment driver for our clients and there is now the opportunity to invest at attractive yields in assets which have historically been too highly valued”.

That message still holds good today and 2024 should see the commercial property auctions sector benefit from a certain amount of pent-up demand from investors who have remained on the sidelines until the outlook both for the UK economy and the commercial property market has become clearer.

So, whilst we feel our way into a new phase of the cycle, my view would be that we’ll see a continuation of the greater pragmatism shown in 2023 by owners and their advisers as to where prices really are and also improved clarity as to the potential for future asset management. Coupled with more attractive finance terms and a growing pool of committed investors, this should lead to greater liquidity and a higher number of transactions.