Britain’s commercial property market is beginning to show signs of recovery after a prolonged period of stagnation following the pandemic. However, this resurgence is largely characterized by significantly lower prices, raising questions about the true state of market demand and the potential trajectory for property values moving forward.
Recent activity has highlighted some substantial office properties currently up for sale, which will be pivotal in determining where the market might find its footing and how quickly deal volumes can rebound, particularly in the office sector that has been severely impacted. The sales of these high-profile properties will serve as a barometer not only for the UK market but also for other countries still grappling with the aftermath of the pandemic.
One prominent example is real estate investor Nuveen, which has placed its 21-storey City of London tower, informally dubbed the “Can of Ham” due to its rounded design, on the market for £322 million ($419 million). This price point is significantly lower than the £400 million it sought in 2022, indicating a marked adjustment to current market realities. Similarly, Canada’s Brookfield is looking for approximately £500 million for its Citypoint tower, down from its last formal valuation of £670 million and a previous sale price of £560 million in 2016.
Despite these reductions, the appetite for new office buildings remains strong. For instance, investor M&G’s new office towers at 40 Leadenhall in the City of London are over 80 percent leased. However, it has become clear that attracting tenants requires more than just prime locations; modern amenities are essential. A recent tour of M&G’s properties revealed that to appeal to potential tenants, buildings must offer facilities such as saunas, treatment rooms, yoga studios, fitness suites, and even cinema rooms—all designed for the exclusive use of office tenants. “We had a conviction that tenants would want to upgrade their space,” said Martin Towns, deputy global head of M&G Real Estate, emphasizing the evolving expectations in the commercial property sector.
The COVID-19 pandemic significantly altered the landscape of commercial real estate, pushing inflation and financing costs higher while simultaneously accelerating the shift toward hybrid and remote work arrangements. As a result, many tenants have become more selective, preferring high-quality spaces that offer flexibility and enhanced amenities. According to Turner & Townsend Alinea, the cost of constructing prime offices in London has surged to over £500 per square foot, up from less than £400 prior to the pandemic. The firm attributes half of this increase to inflation and the remainder to rising expectations for better facilities and sustainability features.
While some properties, particularly older out-of-town offices, struggle to find buyers, the UK market is beginning to stabilize for prime office spaces, rental housing, and logistics. This positive trend is bolstered by a global retreat from inflation and interest rates, which is helping to lower financing costs and enhance the attractiveness of property investments.
“The mood music has definitely changed in the UK,” stated James Seppala, head of real estate for Europe at Blackstone, the world’s largest commercial property investor. “There is more robust activity, and more participants are coming off the sidelines.”
Despite these optimistic signs, the office sector continues to lag behind other commercial property markets. Deal volumes across the UK commercial property landscape—encompassing offices, retail, logistics, and rental housing—saw a 26 percent year-on-year rebound in the second quarter, according to MSCI data. However, office sales are down 21 percent thus far in 2023, with no transactions exceeding £100 million in the first half of the year, a first since 1999.
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Compounding these issues, overall office vacancy rates are rising, with London hitting 10.1 percent in the third quarter—the highest level in over two decades, according to CoStar. The situation is even more pronounced in areas like eastern Docklands, where vacancy rates approach 17 percent.
Property investors and agents are noting a shift in attitudes among potential sellers, many of whom are beginning to accept the current market realities and lower price points. Some may be compelled to sell due to high refinancing costs, though interest from foreign buyers remains strong. “Many investors are saying the UK is a good investment location because of the stable political situation and they want to get in before prices start to rise,” explained Fiona Voon, head of real estate capital markets UK at BNP Paribas.
Domestic investors like Schroders are also gearing up for increased activity, planning to invest hundreds of millions of pounds in British commercial properties, with a focus on prime office spaces. The sentiment around offices has shifted, with investors recognizing the potential in adapting to new market demands and tenant expectations.
As the UK commercial property market embarks on this tentative recovery, the outcomes of these key property sales will likely play a crucial role in shaping future investor confidence and market dynamics in the months ahead.
