Leading Indicators | Changing tides: UK CRE outlook improves, despite wider headwinds

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LIGHT SPRING BUDGET

Last week's Spring Budget had limited implications for commercial real estate, except for the introduction of 'Reserved Investor Funds' (RIFs), a new investment fund structure. RIFs are expected to attract pension funds and other capital sources to invest in UK CRE, enabling the regeneration of town centres and accelerating net-zero goals. RIFs enable UK-based real 

Overall, fiscal policy announcements were relatively light, signalling the potential for a final pre-election Autumn Statement with more significant changes. Chancellor Hunt announced tax cuts totalling £13.9 billion in 2024/25, including a 2p reduction in national insurance tax for employees and freezes on alcohol and fuel duties. Tax increases for non-domiciled individuals, holiday lets, and oil/gas firms partly balanced these cuts. Despite these adjustments, fiscal policy will tighten by c.£41.2 billion in 2024/25 and a cumulative £77.6 billion by 2028/29, according to the OBR.

UK CRE OUTLOOK UPGRADED

The latest IPF Consensus forecast highlights improved expectations for UK commercial property performance in 2024, 2025, and 2026. The total return forecast for UK All Property in 2024 improved by 90bps to +5.9% in February. The upward revision was driven by a more robust rental growth outlook of +2.0% y/y and a slight increase in anticipated capital value growth (+0.8%). Except for Industrial (+3.6%) and Retail Warehouses (+0.3%), all sectors are expected to record a decline in capital value in 2024 but are forecast to return to positive growth in 2025. Between 2024-2028, both Industrial and Retail Warehouses are anticipated to outperform with a total return of +8.4% and +8.1% per annum, respectively, followed by Shopping Centres (+7.1% p.a), Standard Retail (+6.8%) and Offices (+6.3%).

ANOTHER DRIVER OF DEMAND FOR UK INDUSTRIAL SPACE

Ongoing attacks from Houthi rebels in the Red Sea have impacted trade via the Suez Canal shipping route that connects the UK and Europe with China and East Asia. The IMF estimates that trade through the Suez Canal has dropped by -50% y/y in the first two months of 2024. Alongside a drought in the Panama Canal, this disruption to global supply chains has impacted costs, with the Baltic Dry Index (a measure of global shipping prices) up +13% since January. Our latest Future Gazing research outlines that manufacturers will continue to focus more on supply chain resilience and the need to expand domestic production. Here, manufacturers and logistics operators have been holding additional stock, bolstering their domestic manufacturing capabilities, and sourcing more components from domestic suppliers.

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