UK commercial investment set to boom as interest rates fall, says savills 

Savills has forecast a significant upturn in UK commercial property investment following the Bank of England’s base rate cut this month.

Savills has forecast a significant upturn in UK commercial property investment following the Bank of England’s base rate cut this month.

The agency reports that cross-border investment into UK commercial real estate reached US$14 billion in the first half of 2024, surpassing both the USA and European markets.

Rising confidence in UK commercial property

While some investors remain cautious ahead of the new government’s first budget in October, Savills suggests that an inflection point has been reached. With the initial interest rate cut, and more reductions expected, investment volumes are projected to rise in Q4 2024 as confidence in the UK’s economic fundamentals strengthens.

The current average yield for prime UK commercial property remained stable at 6.07% in July, but Savills anticipates yield hardening towards the end of 2024, especially following a predicted 25 basis point rate cut in November. Further cuts expected in 2025 should also bolster demand and boost returns.

Retail rental growth accelerates

James Gulliford, joint head of UK commercial investment at Savills, highlights the growing confidence in UK economic fundamentals, noting that tenant demand is rising across sectors. “For the first time since 2017, all MSCI average rental growth indices are showing positive year-on-year growth, with the most notable increases in retail rental values.”

Retail rents are now recovering from their previous affordability peaks, joining prime industrial and office spaces in experiencing consistent rental growth. This marks a turnaround in the retail sector, which has been challenged in recent years by falling rents.

Political stability supports investment

Mat Oakley, head of UK and European commercial research at Savills, notes that the UK’s focus on supporting economic growth is crucial to reversing the negative macro trends of the past eight years. “While progress will be slow, the UK appears more politically stable than it has in a long time, and its real estate now looks relatively inexpensive compared to other European markets,” Oakley commented. This improved political and economic outlook could lead to a recovery in international investors’ perceptions of UK property as a less risky and more lucrative option.

Future outlook for UK commercial investment

Savills anticipates a robust recovery in the UK commercial property market, with increased international interest and rising tenant demand driving yields higher. The combination of interest rate cuts, political stability, and competitive property prices positions the UK as a prime destination for global real estate investors.