Investment

With mixed predictions for the UK’s economy as we enter 2024, it remains to be seen whether things are truly improving for the commercial property market.

Despite lingering political uncertainty and rising vacancy rates in certain locations and asset classes, there is cause for some positivity. Largely, this is due to continuing rental increases (especially in prime office space) and the potential for stabilising interest rates.

Interest rates

In the run up to 2024, investors welcomed the predicted peak of interest rates at 5.25%, following 14 consecutive increases since December 2021. There is also reason for cautious optimism over the Bank of England's shift from rate increases to stability, with economists predicting rate cuts from as early as May or June. This is especially true when combined with declining inflation rates.

The increases in rates that we’ve seen throughout 2021-2023, along with high rates of inflation, had a detrimental effect on the property market in the UK. These rates stifled the ability to borrow on affordable terms, leading to the retention of capital by many investors.

The prospect of economic stability, combined with falling inflation, should inspire confidence in the property market and result in heightened transaction activity. There’ll be many investors in the market who are eager to put capital to good use following the lull of the last few years.

Register of Overseas Entities

Overseas investors should be aware of recent changes to the Register of Overseas Entities regime, following the Economic Crime and Corporate Transparency Act 2023 (ECCTA). The recent piece of legislation amends and broadens the scope of property ownership in the UK by overseas entities.

Overseas entities need to ensure that they have complied with their updating duty under the existing rules. Given that the deadline for original registration was Wednesday 31 January 2023, many businesses will have passed or be approaching the first anniversary deadline for updating their information at Companies House.

The ECCTA introduces a new requirement that overseas entities provide details of any trust or nominee structures, seeking to close a perceived loophole. Companies must disclose the identity of relevant trust beneficiaries, being the ultimate beneficial owners of properties held in their trust structure. The relevant title numbers for each qualifying interest that the company holds must also be provided. The ECCTA also introduces a new statutory notice procedure, which Companies House can use to request further information from overseas entities. These changes should refine and strengthen this obstacle to overseas investment in UK property.

Green investment

For many, the government’s response to the Climate Change Committee’s 2023 Annual Progress Report was disappointingly vague. Investors have been left pondering how to prepare for future changes to energy efficiency standards in commercial properties.

Many commercial buildings in the UK currently rated below existing EPC standards. It’s therefore important to check if any upgrades are needed to ensure that existing properties are compliant.

Aside from regulatory reasons, there’s an increased appetite for premium office space with strong environmental credentials – and occupiers are willing to pay extra for it. However, as working from home remains popular, investors will need to ensure that their offerings entice businesses to take up office space. While the new hybrid norm should improve the confidence of investors into the premium office sector, we anticipate that investment could be focused on upgrading existing space.

Key takeaways

Optimism derived from stabilising interest rates, combined with reducing inflation, should spark increased confidence in the property market for a stronger 2024.
New and existing overseas investors must remain informed as to the changing requirements under the Register of Overseas Entities regime. They must act accordingly, providing the required information to Companies House at the relevant times.
Overseas companies that are already registered at Companies House must comply with their annual updating duty in the relevant time frames, depending on the date of their first registration under the regime.
Uncertainty around the government’s overall green strategy, and the future requirements for EPC ratings in commercial properties, persists. This will require many investors to evaluate these priorities independently of regulatory pressures.
Despite the lack of a clear regulatory framework on energy efficiency standards, a continuing appetite for prime office space is likely to see many investors upgrading their existing space.
The demand for high-end office space will keep the gap between the rental incomes from premium and secondary space growing.

Contacts

Ayesha Hasan

Partner, Real Estate +44 (0)790 021 3300 ayesha.hasan@irwinmitchell.com

Keith Davidson

Partner, Planning & Environment

+44 (0)737 906 7832