UK commercial real estate shows strong performance, says BNP Paribas

Investor sentiment has improved, with sterling continuing to strengthen, reaching its highest level against the dollar and the euro in over two years. This helps to attract overseas investors and boost UK weightings in global real estate allocations.  

Performance is recovering too and total returns were positive across all main sectors over the last three months – the first time this has been the case in over two years. It is important to note, however, that this recovery is expected to be gradual as investors and the market continue to find their feet. 

Etienne Prongué, CEO of BNP Paribas Real Estate commented, “UK real estate data continues to be reassuring. The trajectory for capital value is now positive across all property types and confirms the UK market is further along in its recovery than the rest of Europe. With the development pipeline remaining constrained and business surveys continuing to point to expansion, our forecast for prime office returns point to continuing UK outperformance over the next five years.”

Modest recovery for retail 

The latest data from Colliers indicates that the retail market is showing signs of modest recovery.  

In capital markets, retail investment volumes increased to £200m in August. Although this is above the £150m reported in July, it is still significantly lower than the five-year monthly average for August, which stands at £660m. The largest single-asset transaction in August came from JP Morgan, who bought 291 Oxford Street for £70m at a 5.8% yield. 

In occupier markets, retails sales volumes increased by 2.5% annually in August but are still below pre-pandemic levels. Meanwhile, annual retail price inflation was at 3.5% in August, having lowered to 2.9% in June. Also, retails rents have risen for 22 consecutive months. 

Positive sentiment from Savills

According to Savills, there seems to be a more positive sentiment in the UK commercial market. 

All sectors saw yields trend downwards or stay the same in August. Investment research firm MSCI reported that total returns were positive across the whole UK commercial market. The only sector displaying a yearly negative return was offices; however, Savills expects this sector to pick up and return to positive territory in Q1 2025. Future supply is very limited, which will cause prime rents to keep increasing. 

The UK dominated European activity in H1 of this year, with a 29% share of investment volumes – 24% above the five-year average. There has been a notable increase in activity from French SCPI (Société Civile de Placement Immobilier) collective funds, who are investing in UK regional markets.  

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 All details are correct at the time of writing (16 October 2024)

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