Commercial market update Q1 2023

The bond vs property yield spread ticked up in Q4 but remains nearly the narrowest in a decade.

The yield spread bounced back slightly towards the end of the year as gilt yields fell back as the political landscape became more stable but remains close to the low at the end of last year, which was at a level not registered since the GFC of 2008/9. Property yields continued to climb in Q4 as the sector re-priced to absorb higher borrowing costs. The next 18-24 months will all be about income returns and seeking to minimise any capital depreciation.

Offices: Two tier market continues. Enticing workers back to offices and the desire among businesses to ensure their buildings fit with their ESG aims means that the two-tier office market continues, especially in London. The net absorption of prime London offices has been positive all through the pandemic, while poorer quality stock has registered -10m sq ft of negative net absorption. While office take-up across the UK hit a four-year high in November, overall net absorption remained negative as more space was delivered. There is a full pipeline for delivery meaning vacancy rates will rise this year.  

Retail: Some stabilisation ahead. The pick-up in footfall as lockdown ended, which provided a boost to this sector which was deeply affected by the pandemic, will now be challenged by the cost-of-living crisis and economic headwinds. But in markets where re-pricing has already happened, this may provide the basis for more stable conditions ahead. Yields continued to soften in Q4 , across retail especially impacting supermarket capital values which declined by -16.3% over the quarter. Business rates changes coming into force in April will provide a fillip for the sector.

Industrial: Strong demand remains. After a bumper few years during the pandemic when rents and values climbed sharply, the market saw a dramatic price correction in the second half of 2022. Demand remains strong and supply is constrained in some areas, which put a floor under rents. But the increased cost of borrowing and the cloudier economic outlook resulted in a softening of yields which continued in Q4, up 1.3 percentage points since the summer, but still at levels last seen in May 2020.

Economy: The picture is brighter than October, but the era of ultra-low base rates is over. The Bank of England raised rates to 4% in February, and while there is some disagreement if another rise is on the cards imminently, there is broad agreement that the 10 or so interest rates rises seen over the last 12 months will not be unwound in the near future. We may see rates peak and start to fall back later this year or in 2024, but borrowing costs are set to remain elevated in the medium term, creating more opportunities for cash investors. There is more detail in our latest economic outlook.

Development: Change of use and build costs top of mind. As proposed new rules on EPC ratings move closer, the increased cost of refurbishment – given the sharp inflationary pressures of the last year – will be top of mind for landlords and developers. Where investment is being made, developers and landlords are increasingly looking at change of use, alongside other asset management initiatives.


The information provided in this report is the sole property of Cluttons LLP and provides basic information and not legal advice. It must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Cluttons LLP. The information contained in this report has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. Cluttons LLP does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.

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Gráinne Gilmore, director of research & insights, Cluttons
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Jonathan Rhodes

Partner, commercial valuations

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