Rising mortgage rates are reshaping the UK property market, with commercial properties emerging as a more resilient investment option compared to residential.
As tighter lending criteria and high interest rates impact homebuyers, commercial transactions have steadily increased their share of the market, now accounting for 10.6% of all property sales in 2023-24, up from 8.0% in 2020-21, according to new research from peer-to-peer real estate platform easyMoney.
Data analysis from the Bank of England reveals that, unlike residential buyers, commercial property investors appear more equipped to navigate the high costs associated with financing. In fact, while residential transactions peaked in 2006-07 when mortgage finance was widely accessible, they have since been hindered by rising house prices and stricter lending rules. A temporary resurgence in 2020-21, when the Bank of England’s base rate dropped to 0.1%, saw residential lending make up 92.0% of market transactions, only to decline again as rates climbed.
Since 2014, commercial property has seen stronger growth, with non-residential transactions increasing at an average annual rate of 2.1%, compared to a 1.4% growth rate in the residential sector. This trend was particularly evident as recent residential transactions dropped by 11.2% in 2022-23, followed by a further 17.8% fall in 2023-24, reaching just over one million. In contrast, the commercial property market has shown relative stability, with non-residential transactions only declining slightly, by 1.1% in 2022-23 and by 4.1% in 2023-24.
The stability of the commercial sector suggests that investors in this area are better able to withstand fluctuations in borrowing costs. easyMoney notes that recent cuts in the Bank of England’s base rate, including a 0.25% reduction in August 2024, signal a potential easing of mortgage costs, which could benefit the market as a whole. Early indicators from June 2024 show mortgage approvals up by 26.5% compared to the same month the previous year, hinting at a potential rebound in both residential and commercial transactions for the 2024-25 financial year.
An easyMoney spokesperson comments: “The residential market has faced significant challenges due to high financing costs, limiting the ability of many consumers to buy homes. The commercial sector, however, has been more robust, with investors in this space better positioned to absorb rising costs.”
The current property market landscape underlines the growing appeal of commercial investment, especially as rate cuts may provide further momentum in the coming months.
