UK commercial real estate recovery

After several lean years, the UK commercial real estate market experienced positive real rental growth in 2024. This growth is a significant indicator of the market's resilience and the robust demand for space in many of its segments.

This recovery can be attributed to several factors, including modest economic growth, a rebound in demand for office and retail spaces, and strong rental growth in logistics and residential assets. As businesses expand and new enterprises appear, the demand for real estate rises, leading to higher rental rates.

However, it is essential to note that real rental growth is not uniform across all sectors of the UK market. Different sectors experience varying levels of supply and demand, which can influence rental growth rates.

For instance, the office sector saw its real rents drop by 0.5% in 2024 at the All-Property level while, based on data from CBRE and the ONS, prime rents in areas like the City or West End rose by 7.2% and 4.0%, respectively, in real terms over the same period. This highlights the bifurcated nature of the office leasing market and suggests that prudent asset selection can help investors build a portfolio of offices that deliver attractive real rental growth.

On the other hand, the residential sector, based on data from MSCI and the ONS, saw a real rental growth of 5.2% last year. The tight supply of rental units, ranging from student housing to multifamily and single-family assets, led to a sharp increase in nominal rents well above inflation. Increasing supply would help alleviate price pressures in the leasing market.

Efficient allocation of capital between sectors is crucial for investors looking to maximize risk-adjusted returns. By understanding the unique cycles of supply and demand in each sector, investors can make informed decisions about where to allocate their resources. This strategic approach can help mitigate risks and capitalize on growth opportunities in the recovering market.

To summarize, the positive real rental growth in the UK commercial real estate market in 2024 is a promising sign of recovery. Investors should pay close attention to the varying growth rates across different sectors and allocate capital efficiently to optimize their returns. This approach will ensure that they can navigate the complexities of the market and benefit from the ongoing recovery.