Commercial property examiner Q4 2024

President Trump’s tax, immigration and tariff policies may prove inflationary requiring higher interest rates to suppress demand and tempt investors to buy US government debt.

Treasury yields have already shot up, pushing up bond yields around the world. The increased cost of debt erodes the money available to improve the UK’s services’ sector and improve its infrastructure which is at the core of the new UK government’s growth agenda. If sterling were to fall against the dollar, the Bank of England is likely to maintain base rate at a higher level than otherwise would
be required to support economic growth.

US stock markets have driven world stock markets to a second consecutive year of 20% plus returns in 2024. But the FTSE and other European markets had a quieter year. The FTSE All Share REIT index ended the year down -16% as gilts were sold off by investors and benchmark risk free yields softened. Industrial property specialist Prologis and Segro ended 2024 down 20.7% and 20.9% respectively.

The UK’s first base rate cut was delayed until August last year and had a minimal effect on commercial property in Q3. However, a further 25 bp reduction to 4.75% in November made some contribution in boosting Q4 performance and led to better than-expected results for 2024. MSCI’s All Property total returns rose to 2.8% from 1.8% in Q3. For the year ending December 2024, total returns increased to 7.0%, up from 2.9% for the year ending September, as weak data from Q4 2023 was excluded. We consider that some of this improvement was down to sentiment rather than any fundamental shift in the market.

The interest rate outlook for 2025 is uncertain. Last quarter, the UK’s real estate markets were expecting further reductions in the Bank Rate as annual CPI inflation dropped below the 2.0% target and economic growth stayed weak. However, inflation has risen above target again, and the Fed’s reaction to the Trump administration’s ambiguity remains unclear. Despite this, we anticipate that UK CRE recovery will continue, with total returns rising to 10% for 2025. But the downside risks have increased.

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Jamie McCombe

Partner

T +44 (0) 20 7647 7234
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Grainne Gilmore

Head of Research

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