Commercial property values across the UK could fall by as much as 15% by the end of next year as rising interest rates make financing deals more expensive, a leading asset manager has warned.
The risk of recession also threatens to slow rental growth, however there are hopes that Aberdeen could buck the wider trend.
The full impact of rising borrowing costs is yet to show up in official data, according to Nick Montgomery, Schroders’ head of UK real estate investment.
However, he told The Times that transactional evidence shows that investors are becoming more cautious about how much they are willing to pay for some types of property.
The value of commercial real estate such as warehouses and offices has risen sharply over the past decade, which has compressed the yield generated for institutional investors by owning these assets.
Commercial landlords make money when the rental yield outweighs borrowing costs.
“You need a higher yield to start with to compensate you for what we’re seeing with rising rates,” Montgomery told the newspaper.
Five-year swap rates, used to determine finance terms for borrowers fixing debt, have risen to 3.60%, from 2.45% in August and 0.55% in September last year.
Based upon higher swap rates and a slowdown in consumer spending, property values are likely to be 15% lower at the end of next year than they were at the end of last year, according to Montgomery, who manages the London-listed Schroder Real Estate Trust.
What about Aberdeen?
However, the picture is looking slightly different in Aberdeen, where after several difficult years, the commercial property market is picking up again, buoyed by a renaissance in the oil and gas sector.
Aberdeen office market figures from CBRE show that the total take-up in the first half of the year was 256,426 sq ft, a 361% rise from the same period in 2021.
Q2’s figure of 60,521 sq ft also represents the strongest Q2 performance for office take-up since the start of the CV19 pandemic, further indicating that Aberdeen is starting to recover now that CV19 restraints have been lifted.
The figures are backed-up by Savills, who said office take-up in the first half of the year (2022) across the three largest Scottish cities saw Aberdeen outstrip activity in Edinburgh and Glasgow.
Dan Smith, office agency director and head of Savills Aberdeen office, comments: “It is clear that our North Sea Oil & Gas industry is a key component in the UK’s transition to more sustainable energy solutions, allowing a reliance on domestic production rather than importing energy from elsewhere, where regulation is ambiguous and there are associated carbon costs.
"As such, occupiers in the Oil & Gas sector are increasingly inquisitive in their property requirements in and around the city, and this demand alongside the increasing activity from Renewables, decommissioning and other sectors, sees the best office space beginning to fill up.
"With demand expected to continue on an upward trajectory, 2022 looks likely to see the strongest office letting activity in Aberdeen in eight years.”