Commercial market update Winter 2024

Investment activity picks up as commercial property turns the corner, but the divergence within the office market is becoming more entrenched.

Economy: Mixed picture, but further rate cuts are on the horizon.

• There are mixed signals from the UK economy. There had been a sense of anticipation in the weeks and months leading up to the Budget on October 30^th, and this anticipation actually held up activity in some sectors. The Chancellor announced several moves in her Budget to boost tax-funded spending, and the Office for Budget Responsibility (OBR) said that these moves should boost economic growth next year, up to 2%, before growth falls back in 2026 to 1.8% and 1.5% in the following three years.  
• However, one of the biggest changes announced by the Chancellor was an increase to employers’ National Insurance payments, lifting the contribution by 1.2 percentage points and lowering the threshold to £5,000 from April 2026. This tax rise will raise billions for the Treasury, but business leaders and businesses are already warning of the impact, including a slow-down in investment and recruitment, which could impact growth. Business confidence has fallen to the lowest levels since those registered at the start of the pandemic.  
• Inflation, which had been falling consistently also rose in October, and is expected to rise further as increasing energy prices feed through to the headline rate. This would seem to rule out any cuts to the base rate until inflation recedes, but the deputy Governor of the Bank of England said that any slowing down in the jobs market would necessitate speeding up rate cuts in 2026.  
• The Budget changes were enough for many economists to amend their expectations for the path of base rates next year, however. Many now anticipate that the base rate will settle at 3.5% from 2026, compared to early October 2025, when forecasts were showing the base rate falling to 3% by the end of year 2026. Capital Economics forecasts that the base rate will be at 3.75% at the turn of the year in 2025/26 and fall to 3.5% in early 2026 (see chart below).  
• All eyes are now on the Bank of England on 19 December for the next base rate decision. The central bank also must factor in the wider geopolitical risks around the ongoing crisis in the Middle East, the continuing conflict between Russia and Ukraine, and the inauguration of Donald Trump as US president. His favour of tariffs means that the landscape in the US may be more inflationary than in recent years, and this may be reflected in the Fed rates – something which UK rate-setters will watch closely. 

Property market overview:  

• In many sectors, the re-basing of property looks to be close to complete. All property capital values rose 0.8% on average in the six months to the end of October, and although they are still down -1.9% on the year, this compares to a decline -5.2% at the start of 2024.   

• The yield spread has been narrowing throughout the year, and the post-budget rise in gilt yields has emphasised this trend. The exception here is the office market, with average yields being pushed up by secondary and tertiary office stock. The overall narrowing of the spread could put some upward pressure on yields into 2025, which means the recovery in capital values could be spread out over a longer period.  

• Performance remains highly localised and stock-dependent with a flight to quality in all asset classes.  

As examined in more detail in our recent Commercial Property Examiner we expect total all property returns at 6% this year, from -0.1% at the end of 2023, mainly driven by income return. We expect equivalent returns for all property to average 7.6% between 2024 and 2027. 

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