Commercial market update Spring 2024

Sunny view of the facade of the Bank of England building

Economy: When will rate cuts start?

It’s now widely accepted that interest rates have peaked, the key question now is when will the central bank start to cut rates, and how low will they go in the coming year.  

At the end of last year, while inflation was falling quickly, there were expectations for five quarter point cuts this year, starting in late Spring. But increased stickiness in inflation coupled with stronger than expected wage growth has dampened these expectations somewhat, and forecasts for rate cuts have been pushed back into Summer, with most tipping three or four rate cuts this year.

This precipitated a rise in gilt yields, indicating the rising cost of money and gearing in recent months. The recent Economic and Fiscal outlook published by the Office for Budget Responsibility (OBR) alongside the Budget shows market forecasts for the base rate to be at 4.2% at the end of this year (effectively 4.25%) and 3.3% (effectively 3.25%) by the end of next year.

Capital Economics expects rates to be at 3% by the end of next year. Given the ongoing crisis in the Middle East, it cannot be ruled out that external inflationary pressures once again emerge if oil prices start to rise, something the OBR includes in its models for the UK economy in the coming years.

Graph showing UK annual inflation change

The economic outlook remains downbeat for this year, with the OBR forecast showing 0.8% annual growth in GDP in 2024. However, the forecast does get brighter for next year and 2026 with an expected 1.9% and 2.0% growth in GDP respectively.

Property market overview:

The spread between the average equivalent yields and 10-year bonds widened markedly in Q4 due to a drop in gilt rates and continued upward movement in yields across all sectors amid ongoing uncertainty over borrowing costs and vacancy rates in some sectors.

As ever, the market remains sector dependent and localised. All property capital values fell by -5.6% in 2023, ranging from -21% for city offices in London to +7.9% for industrial assets in the South East.

Graph showing sector equivalent yield spread over 10 year bonds

Graph of sector equivalent yield spread over 10 year bonds from 2016

As examined in more detail in our recent Commercial Property Examiner, we expect total all property returns to rise to 6% this year, from -0.1% at the end of 2023. Prospects for higher levels of performance in 2025 and 2026 mean returns could rise further to 8% in 2025 and 2026.

Offices: The structural change in the office market continues. There is a strong appetite among occupiers for best-in-class office space which meets high net-zero requirements and less demand for secondary or tertiary space. The investment market was quiet overall in 2023, although there is evidence of interest among investors where pricing is competitive and there is opportunity for change of use, re-development or value-add.

Industrial: Vacancy rates creep up and rents ease. The recalibration of the industrial market after the pandemic uplift continues, but overall, the sector continues to outperform compared to other asset classes. There has been significant repricing in the sector, but robust occupational market conditions amid tight supply are helping to maintain a continued confidence. Investment levels slowed in 2023, but investors remain active and the rise in yields will attract more buyers during 2024.

Retail: Take-up rose towards the end of 2023, but overall vacancy rates are flattered by the lack of supply in the market. The bright spot for landlords is luxury retail and retail parks, where consumer demand is still relatively stronger. Investment activity in these markets has also been stronger through 2023, although total investment volumes were still half the 10-year average last year. Given the re-pricing in shopping centres, there were some large investment deals in this sector in 2023 driven by large discounts to asking price. Investors are also looking for opportunities for re-development or change of use.

Alternatives: 2023 was a strong year for hotels and residential. Average RevPAR for hotels rose 15% in 2023, amid higher occupancy and rates, and the outlook for 2024 is good given the expected increase in visitor numbers to the UK. The investment market was subdued in 2023, but has started strongly in early 2024, including the sale of 66 Travelodge hotels. Average yields are at 5.6%. The Living sector remains strong – with Build-to-Rent market remains strong amid a lack of rental supply across the UK, which has pushed average rental growth up to 7%, and this rate will be higher for new lettings deals being agreed. The rate of rental growth has peaked however and is expected to continue to ease during 2024 amid affordability constraints. Investment levels remained high in 2023, despite rising costs and the fragmented planning approach make the environment more challenging. Purpose-Build Student Accommodation (PBSA) is also performing strongly for best-in-class assets in key university towns amid a lack of supply.

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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Jonathan Rhodes

Partner, commercial valuations

T +44 (0) 20 7647 7246
Headshot of Jonathan Rhodes, national head of valuations, Cluttons

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Richard Moss

Partner, commercial valuations

T +44 (0) 20 7647 7226
Richard Moss

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Ralph Pearson

Partner, commercial agency

T +44 (0) 20 7647 7037
Ralph Pearson

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Gráinne Gilmore

Director of research and insights

T +44 (0) 20 7647 7142
Gráinne Gilmore, director of research & insights, Cluttons

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