- UK commercial real estate deals predicted to rebound to £47bn in 2024
- Real estate investment trusts face "income risk"
Annual real estate transaction volumes are forecast to slump by a third this year before rising 15 per cent next year, with a leading property agency saying that income is now more of a risk to commercial landlords than further valuation decreases.
Following the release of BNP Paribas Real Estate’s transaction data for the first half of this year, the agency (a subsidiary of the French bank) has forecast that the total UK real estate transaction volume for 2023 will be £41bn, a third down on both last year and the long-term average. But the outlook is positive: that figure will rise 15 per cent to £47bn for the year 2024, and Vanessa Hale from BNP Paribas said the lack of distressed assets coming onto the market showed restraint on the part of debtholders. "Lenders are clearly reluctant to call in badly performing loans that would require asset sales while conditions are tough," she said.
The agency has made its prediction on the basis that the Bank of England base rate will peak at either 5.5 per cent or 5.75 per cent.
Its capital markets research lead, Charlie Tattersall, said the forecast also assumes “a mild technical recession at the start of next year”.
Tattersall also said real estate asset values have stopped falling, further adding to the possibility that some Reits' share prices may have bottomed out. Instead, he said the issue for landlords now is a fall in rental income as the economy wobbles.
“We’re moving into a different phase of the market where, instead of worrying about capital value decline and balance sheets, we’re moving towards income risk,” he said.
Such a scenario would be problematic for Reits and their investors. While many have booked large valuation drops in their most recent results, many have also recorded net rental income increases, which has driven dividend increases.
Tattersall does not predict that all asset classes will fare equally, saying lower-quality office stock will “play a big part” in the transaction volume drop this year, with questions around energy efficiency and the post-Covid working environment hurting their investment case. By contrast, he said industrial and residential assets, such as build-to-rent and student accommodation, could drive the investment volume recovery in 2024.
