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The UK’s commercial real estate market is beginning to recover faster than the rest of Europe from a brutal two-year downturn brought on by high interest rates.
Deal volumes and property values in the UK increased in the first half of 2024, according to market data. In Germany and France, Europe’s biggest markets after the UK, dealmaking failed to pick up and prices eked out a smaller gain in the period.
Industry executives and agents said the UK has benefited from hopes for political stability after the general election, stronger economic prospects, rising rents and a more moderate run-up in prices between Brexit and the market’s peak in 2022.
“The UK has probably been the fastest recalibrating market,” said Mark Ridley, chief executive of Savills, which advises on commercial deals. “Where there is uncertainty is how fast and how far the recovery goes.”
Commercial real estate values have fallen by almost a quarter across Europe from their peak in 2022. However, prices rose by about 1 per cent in the first half, according to an index from Green Street. The UK outstripped France and Germany with a 1.4 per cent gain.
In the UK transaction volumes rose 7 per cent, with €26bn worth of properties changing hands, according to MSCI, while volumes across continental Europe flatlined.
Signs the UK market is heading towards a quicker recovery come despite the European Central Bank cutting interest rates in June, two months before the Bank of England did.
“We see the market starting to turn a corner,” said Ben Sanderson, managing director, real estate, at Aviva — one of the UK’s largest institutional real estate investors, managing about £50bn. “We have been buying into that story for some time.”
The nascent recovery belies the fact that some types of real estate are in greater demand than others.
Prices for warehouses, residential property and hotels have already improved modestly over the past year, according to Green Street’s European index. Other sectors, notably office buildings, are still experiencing steep declines in value.
The first half of 2024 was the worst for the UK office market since MSCI starting tracking it in 2001, with just €4.2bn worth of transactions. Growth has instead come from sales of apartment buildings, student housing and hotels.
Sanderson warned he expected the recovery would be “k-shaped”, with some properties continuing to decline in value while others rebounded.
Investors are being very choosy in what they will buy. The traditional main real estate sectors — office, retail and industrial — are all still reporting annual declines in dealmaking across Europe, according to MSCI.
The biggest buyers of real estate in Europe over the first half include big US private equity groups Blackstone, Ares and KKR, MSCI said.
Blackstone said it invested about $3bn in European real estate, not including debt investments, with the largest share going to the UK — where it struck big deals for new homes with Vistry, and bought a hotel chain, logistics warehouses and a luxury retail block on New Bond Street.
James Seppala, Blackstone’s head of European real estate, said the firm is focusing on “logistics, residential, leisure and data centres” because these sectors are “benefiting from occupier and investor demand tailwinds”.
Dealmaking in the UK has been boosted by some large transactions, including LondonMetric’s takeover of LXI. Other listed landlords, including Segro, Unite Students and GPE, have raised equity this year to fund new investments as they look to capitalise on a sustained recovery.
UK property valuations are more closely tied to current market conditions than elsewhere in Europe, a feature that typically helps the market reprice more quickly.
