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The commercial property market: the state of play

24th May 2023
Brought to you by
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Allica Bank is Britain’s award-winning business bank focused exclusively on supporting established...
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The commercial property market has been through a tumultuous 12 months. With Liz Truss’s ‘mini budget’ causing disruption in the UK and continuing geopolitical uncertainty affecting global markets, businesses looking to buy their premises or invest in property will have had a tricky time keeping on top of everything. 

The commercial property market: the state of play | Allica Bank

Thankfully, signs of stability are beginning to return to the market. With this backdrop, Allica Bank has spoken to a range of commercial property experts to help make sense of it all. 

Interest rates 

Gareth Anderson, Allica Bank’s own Head of Business Management, explained the volatile situation with interest rates in measured terms. 

“Signs point to an easing in interest rate rises in the coming months,” which will be a huge relief to borrowers who “have been stung by rapid Base Rate rises that have placed pressure on cash flow, curtailed new borrowing, and reduced demand for commercial property as a result.” 

Lower interest rates will, hopefully, create a deeper lending market and stimulate growth within commercial property and beyond. 

Gareth went on to say that “the Bank of England will continue to keep a close eye on how quickly and significantly external and domestic inflationary pressures ease and continue to respond to the economic data and facts on the ground.” 

It’s not going to happen instantly or dramatically, but the signals are there to inspire a bit of positivity. 

Commercial property prices 

As VAS Group’s Valuation Panel Director, Andrew Murdoch is well-placed to discuss the changes expected in commercial property prices. 

For retail, it’s somewhat uneven. “The sector has been hit hard in the past few years, but there are pockets of real opportunity — affluent areas have performed especially strongly, but poorer areas continue to lag behind”. The relaxation of rules around changing use class has been – and will continue to be – critical to growth in this segment, he says. 

“Industrial property prices are likely to remain resilient,” he explained, “owing partly to a lack of industrial stock and a noticeable move towards quality, energy-efficient properties”. 

Offices, however, are faring far poorer. “Aside from prime city centre stock, there is relatively low demand in ‘secondary’ or ‘tertiary’ locations for office property and we don’t see this changing any time soon”. 

As you might expect, movement in commercial property prices is uneven across segments of the market, but bright patches are emerging. 


Emma Lane, who heads up Allica Bank’s relationship management team, identified a healthy demand among business owners for purchasing their premises

“Many businesses are buying their premises as a way to cut costs, or at least make them more predictable in uncertain conditions.” On top of securing costs, business owners also see owning their premises as an effective way to future proof their business. “The potential for capital appreciation is attractive, or they could decide in the long-term to sublet the premises and earn rent.” 

“Labour shortages and environmental concerns have both driven more business owners to approach us with a view to buying their premises, too. By owning the property, it becomes more attractive to invest in it, which means they can take action to make their premises more sustainable or create a more positive working environment to help attract and keep talent.” 

Investment buyers 

Andrew Murdoch at VAS explained that “Covid disrupted the way we occupy and use commercial properties and rising borrowing costs have taken their toll on values in the short term, but we are still seeing plenty of activity.” 

While Gareth Anderson believes “the conditions for commercial property investment will remain volatile, offering mixed performances. Many investors have delayed or reconsidered investment purchases altogether due to falling demand bringing prices down.” 

2024 could be a more positive year for investors, when inflation and interest rates will hopefully have fallen and impacted valuations. By then, other macro conditions may be in play, including a lack of development supply and demand for energy efficient buildings.” 

It looks like Q2 might be a little too soon for some to dive into big investment purchases, but there are certainly some incentives to do so in the near future. The 50% first-year allowance (FYA), announced in the Spring Budget, allows for a 50% deduction of special assets from a company’s profits in the year of purchase, including long-life assets (e.g. solar panels or insulation). Renovations, then, may come under FYA. 

As demand for more energy efficient premises rises – as indicated by Emma Lane, as well – there is an opportunity for commercial property owners to take advantage. 

The lending market 

To get a view on lending, we spoke to Simon Burke, Operations Director at broker firm White Rose Finance. He lamented the last few years, as “both the owner-occupier and investment lending markets became much more cautious – especially the sub £1 million market. Lenders increased their stress testing and debt serviceability requirements as cash flow tightened and yields dwindled. The result was that lots of good deals went unfunded.” 

But Q2 has brought with it a more stable market, even if it has come at the cost of higher rates. “Depending on the nature of the deal, some lenders are beginning to open up and relax how they assess affordability,” he said. “Challenger banks are leading the way here and, as inflation curbs, we hope that this will continue into Q3, along with the wider market.” 

It’s not an easy time for those looking for finance, and Simon was at pains to stress how it’s more important than ever for SMEs to assess all of their options clearly. “SLAs were problematic with many lenders in 2022 and the delays cost some businesses, so they’d be well-advised to better understand how a lender works vs. what they want most: speed, rates, or breadth of support.” 

Working with a lender who can back them across different areas of their business is a vitally important decision.” 

In the round 

As you may be gathering from the experts we spoke to, green shoots do appear to be beginning to emerge in the commercial property market. With inflationary pressures easing and interest rates unlikely to rise as quickly as before, a welcome sense of control is returning. 

Experts will rightly encourage a strong degree of caution, with businesses still bearing the brunt of high costs and challenging economic conditions. However, for those clients that might be exploring a property purchase, a much brighter picture may be coming into view.

Speak to your local Allica Bank relationship manager to find more about how your clients can purchase their premises or invest in commercial property.

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