West End offices and logistics are set to lead a recovery in real estate transactions into next year in the UK on the back of peaking interest rates and yields.
In its latest market in minutes, Savills says offices have been the most traded real asset class in the UK real estate markets in the first three quarters of 2023, accounting for 26% of all transactions, after an increase in the number of office transactions in central London from mid-September.
In its October Market in Minutes report, Savills says that prime logistics and West End offices will lead the next phase of the UK real estate investment market cycle into 2024, saying both offer buyers a combination of solid rental growth expectations in a flat-lining economy, and some yield "hardening" over the next five years, and will therefore likely see their pricing recover first.
The adviser says the recent stabilisation of UK interest rates with the Bank of England pausing its period of rises, is mirrored in Savills' all-sector prime yield, which remained at 5.75% in September.
Mat Oakley, head of UK and European commercial research at Savills, said in a statement: “We don’t expect interest rates to begin falling until Q3 next year, but investors can now start to believe that the next move is downwards: this is important for market pricing and activity over the next six months. The removal of one reason not to buy now is important, but buyers’ attention will now focus on rental growth prospects and capex concerns.”
Richard Merryweather, joint head of UK commercial investment at Savills, added that the group's latest investor sentiment survey of European and Middle Eastern pan-European buyers, representing over €500 billion AUM, and published at last week's Expo Real global property trade fair in Munich, shows positive conditions for those looking to sell in the UK.
It found 80% of respondents want to invest in the UK over the next 12 months, driven by both a recognition of the growth prospects and more realistic pricing than some other countries.
"While logistics remain top of their shopping lists, CBD offices unsurprisingly currently aren’t as favoured, but we expect this to change as it becomes more widely recognised how strong the UK prime office market actually is – signs of which are already starting to come through in central London deal activity.”
In its report Savills says the big news remains that the base rate did not rise, leaving the two-year SONIA interbank lending rate below the central bank rate for the first time since early 2023.
It says buyers' eyes will now turn to rental growth prospects and capital expenditure concerns.
Explaining this it points out that rental growth has been surprisingly resilient throughout the latest downturn, albeit only on prime. All of the major urban office markets have seen prime rental growth, averaging 6.4% per annum over the 2019–2022 period, according to its data. Prime logistics rental growth over the same period has averaged 8.1% per annum, and recently it has seen some rental growth in parts of retail.
Savills argues a lack of development and rising tenant bias towards ’prime’ is combining to create pockets of undersupply, even against an overall story of high vacancy rates. It see no prospect of this changing in the next five years, and so it says prime rental growth remains a credible assumption.
Elsewhere Savills says secondary locations and assets will suffer from tenant’s increased preference for prime.
Savills' upbeat forecast comes as CoStar News caught up with leading industry figures to discuss whether UK real estate was becoming more attractive to global investors in the changin economic environment.