Investment in commercial real estate fell to £18.5bn in H1 2023 – less than half the volume recorded in the same period last year, according to the latest data from BNP Paribas Real Estate.
The company now expects total investment volumes for this year to hit £41bn – down a third on last year and the long-term average – before rising 15% to £47bn by the end of next year.
BNP Paribas Real Estate said rising interest rates, which it anticipates could reach 5.50% – with an outside chance of another 25bps increase to 5.75% by year end – was keeping “investors on the sidelines as they refrain from decision-making in volatile conditions”.
The company expects interest rate cuts in Q2 next year, which will marginally improve trading conditions, but it anticipates many investors will wait for the cost of borrowing to fall further before acting.
Vanessa Hale, head of research and insights at BNP Paribas Real Estate said: “The impact of an ever rising base rate on real estate transactions has been stark, with the first half of the year failing to deliver a meaningful recovery for the UK CRE market. However, there is more activity coming through, albeit slowly, and investors are now very sensitive to data releases so any momentum remains complex.”
“Inflation figures recently published all-but confirmed that the Bank of England will do more to bring inflation back to target. A 25bps hike to 5.50% in September now looks certain, and there’s a meaningful chance of another increase before the end of the year.
“While inflation continues to restrain activity, the market should be encouraged by the lack of distressed assets coming through. Lenders are clearly reluctant to call in badly performing loans that would require asset sales while conditions are tough. Healthier balance sheets and resilient rental growth in key sectors and locations is keeping covenant breaches relatively low.
“That said, the reprieve in borrowing costs that we’ve seen in recent weeks has likely come too late for a small number of owners. The Bank of England’s latest survey of lenders suggested that the availability of debt will worsen over the short term. Institutions, though not distressed, are also likely to remain net sellers for the time being. Well capitalised private investors are in a fantastic position to build portfolios for the next cycle.”
