Paul Hannam, head of property at CCLA and manager of the £1bn Local Authorities Property Fund, considers the outlook for UK property.
Last August, the Bank of England cut interest rates for the first time since the pandemic. Another 0.25% cut followed on 7 November, to 4.75%. We expect more rate cuts into 2025, but Labour’s first budget since 2010 and Donald Trump’s election victory remind us that all predictions are risky. Interest rates may stay higher for longer.
So, what does this economic backdrop mean for UK property?
Many believe that lower interest rates are what’s needed to kickstart a property recovery. Interest rates set the risk-free baseline for valuing real estate, so rising rates had caused a downturn. Now, as rates fall, property values are stabilising. That’s positive for market activity and it supports valuations.
But interest rates aren’t the only driver of property growth. Other fundamentals are important too; for example what commercial tenants are doing, leasing activity, and rental growth. A soft landing for the economy now looks more likely than a recession, and that’s important too.
In summary: both capital markets, influenced by interest rates, and the commercial rental market, which reflects tenant demand and rental growth, will together shape this recovery.
Recently, lower interest rates have made property more attractive and boosted investment demand. In the market for commercial tenancies, the MSCI UK Monthly Property Index has recorded rental growth in each of the last 12 months.[1] Moreover, the index shows capital growth on top of income and rental growth, so total returns are improving. We believe that the outlook is good.
Despite short-term uncertainty, commercial property is a long-term investment with historically stable rental income. Since the inception of the MSCI UK Monthly Property Index in 1987, the property it tracks has provided annual returns of more than 8%, with rents contributing 6.7%.
It’s encouraging that yields have been peaking, valuations stabilising, and sentiment improving. Even in more troubled areas, like prime retail and offices, risks have become more balanced.
Industrial real estate, logistics, retail parks and alternative property segments such as residential housing remain popular. Here, returns are visible and achievable, driven by positive outlooks and demand.
Both buyers and sellers remain cautious, but we and many of our colleagues in real estate sense that we’re nearing a new, positive phase – one that’s based on income and stable returns.
[1] MSCI UK Monthly Property Index, October 2024