A leading property investment expert has predicted a year of volatility and uncertainty for the commercial property sector as the global economy and geopolitics remain unpredictable.
James Routledge, Head of Investment at Fisher German, believes that interest rates have stabilised and speculates that they will reduce by a full point during 2024, but higher than the unprecedented low of recent years.
He also feels that levels of conflict around the world, the increased focus on sustainability and net zero, and increased uptake of new technologies by the sector will all play key roles in shaping the 2024 market.
James said: “Last year presented us with a new financial paradigm and continued longer-term structural change, which has delivered the toughest trading conditions for commercial property investment since the global financial crisis.
“This is underpinned by geopolitical uncertainty, global and national economic fragility, a period of high energy costs and food security issues worldwide.
“In the UK, structural changes continue to be an overarching theme for 2024 and beyond. This is already driving extremes of fortunes within property asset classes, with a need to focus on the ‘right kind of asset’, considering demand-supply imbalances, hybrid working, demographics, the growth in online shopping during and after the pandemic, and the built environment’s significant role in a move to a low carbon economy.
“Wider considerations for the 2024 market include inflation falling, a threat of an early recession and low consumer confidence, easing of energy prices depending on geopolitics, and political uncertainty here and abroad given key elections spanning much of the year.
“All these factors suggest 2024 may require careful strategy from investors if they are after healthy returns.”
Despite this, James has found that investor sentiment is showing signs of improvement in the UK market, with industrial, living sectors and social infrastructure in the most demand as traditionally constructed portfolios continue to move away from offices and high street retail holdings.
He also found that occupiers are focusing on upgrading space, especially new high-quality assets with strong ESG credentials and low obsolescence risk.
James added: “The industrial market will be particularly strong in 2024. After a turbulent twelve months, with a sharp correction of investment values, the sector has largely settled, and will remain high on investor’s buy lists.
“While overall occupier demand has softened to pre-pandemic levels with rental growth expected to slow slightly, constrained supply and competing uses, such as residential in urban environments, should ensure pockets of rental growth, which will vary depending on a combination of regional and building specification differences.
“Within the office sector, there is a growing occupational quality divide. Successful workplaces will be more people-centric, collaborative, authentic, sustainable, experiential, and above all, customised.
“The wider adoption of smart technology will be a further driver to achieve this, together with agile working and greater spatial awareness.
“Finally, the UK retail market continues to undergo significant structural challenges, and occupier financial performance is polarised, as shown by improving fortunes for Marks & Spencer versus the insolvency of Wilkos.
“The sector has been helped to some degree by business rates liabilities reducing to nearer current market rental levels, however, serious challenges remain with the increased costs of living hitting discretionary spending and an ongoing exodus of banking branches from the high street.
“Across all sectors, net zero and carbon emissions considerations will continue to grow in importance, with institutional investors focused on purchasing assets with EPC ratings of A or B amongst other sustainability criteria.
Institutional investors are also looking at their broader sustainability strategies and offsetting options to address their corporate carbon emissions – for regulatory as well as reputational reasons.
“While 2024 will be unpredictable, there will be opportunities for asset repositioning and market transactions. Professional advice & market monitoring of market developments will however be essential as it will be volatile.”