Our last article on UK REITs (Real Estate Investment Trusts) was at the end of 2022, and the headline of that article was ‘Will UK REITs continue to fall in 2023?’ Well, we are half way through 2023 and so far, the most appropriate answer would appear to be ‘pretty much’.
Before we look at which REIT sectors have outperformed of late, it is worth taking a look at the state of the commercial property market in general in the UK. On 2 August, Robert Irving Burns (RIB) released its Q3 2023 Commercial Property Report, which, after surveying over 8,000 UK commercial estate agents, found that commercial sales prices per square foot (sq ft) are forecast to drop by -1.5% in Q3 2023. This would be a marginal improvement on the -1.6% in Q2, but both the Office and Retail sectors are expected to see the largest fall in sales prices per sq ft, both down -1.8% in Q3. Overall, rents per sq ft are holding relatively firm, and are forecast to drop just -0.3%, again slightly better than the fall of -0.4% in Q2.
RIB reports that the Industrial sector remains the most positive, with sales prices per sq ft down just -1.0% and rents remaining flat, with supply up 0.8% and demand up 0.2%.
However, as I warned in the December 2022 REITs article: ‘The next (big) challenge facing the commercial property market, especially offices, is the Minimum Energy Efficiency Standard (MEES) regulation, due to come into force from April next year. Under the MEES, from April 2023 commercial landlords will be forbidden from signing new leases with tenants if their building has an EPC rating below ‘E’. This is proposed to increase to a ‘C’ rating by 2027 and a ‘B’ rating by 2030. Many are calling this the ‘EPC time bomb’.’
Unfortunately, the RIB report has confirmed that not only did this deadline pass without many commercial landlords making the relevant improvements to their properties, the report added that around ‘25% of commercial landlords are still unaware, or are not factoring in, the cost of April’s EPC changes, which could cost them hundreds of thousands of pounds.’
Antony Antoniou, CEO at RIB, comments: “All eyes are on the UK commercial property market, as global investors seek to predict where the economy will go next. We enter Q3 with the highest UK interest rates for a generation, but the stubbornly high inflation is finally in reverse. As such, the outlook is more positive and we could see the sector rally before the year is out.”