Not far from the Buchler Phillips office in London’s Mayfair lies Grafton Street. Number 20 is an elegant, though perhaps unremarkable building offering 17,000 sq. ft of office and retail space. Yet its £100m sale in April was one of the highest ever capital values per square foot paid for an office-led asset, marking the beginning of renewed confidence in UK commercial property that is expected to continue through Q3 2024.
The property’s buyer is reported to be an investment firm founded by a group of Russian billionaires but is not subject to sanctions. However, market expert Savills says North American buyers have been dominant in the £100m+ bracket. These investors have found that the West End has resilient occupancy relative to other markets, while very strong rental growth is forecast for the strongest properties in key locations. In addition, the US dollar remains firm against sterling.
Investing more widely in the UK at present are Gulf institutions. Their purchases are expected to grow to more than £3 billion annually, according to new research from Bank of London and the Middle East (BLME), a Shariah-compliant bank based in London. BLME says the UK market is heading for a once-in-a-decade economic alignment, with further cuts to interest rates expected later in the year, a new government in place, falling inflation and lower property prices in some segments of the market.
Purpose-built student accommodation in particular is a popular asset for investors, with 68 per cent of respondents saying their clients were focused on the sector, because of the structural shortfall and low tenant failure rates. The UK remains a popular choice for students from the Gulf, with a record number of UAE residents applying to UK universities.
Needless to say, we also have to highlight areas of caution, since that is our business. The positive picture so far is based on the top end of the market, which is usually frequented by extremely well capitalised investors. It should also be remembered that we’re bouncing off a low base: new lending to UK commercial real estate fell 33% last year to its lowest level since 2013, according to new research from Bayes Business School. It shows that more than 60% of lenders reported defaults across their loan books in 2023, with default levels rising year-on-year from 3.5% to 3.9%.
Sharply higher interest rates over two-and-a-half years had a dramatic effect on borrowing levels and, while transactions volumes are recovering, there won’t be a stampede into UK commercial property prompted by this month’s small base rate cut. An election win by a moderate, pro-commercial development Labour government has already been factored in to investment appetite. The office sector is still being approached with caution by all but the wealthiest buyers with the longest time horizons, but the change in Permitted Development rules and size restrictions on conversion to residential may begin to free more secondary and tertiary assets.
Let’s not forget that for every UK property investor limbering up to secure cheaper money for a growing number of opportunities, there are several still licking their wounds after being caught by sharp hikes in rates two years ago. The future for these remains precarious, but the insolvency toolkit provides options for recovery and some degree of protection.
To discuss these, and to explore debt restructuring or renegotiation, stricken UK commercial property investors shouldn’t hesitate to get in touch for a free initial consultation.
Written by our analysts’ team at Buchler Phillips, an independent boutique firm with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.