Commercial Property Values Down as Residential Market Holds Firm

According to North Yorkshire’s leading property search company, The Property Partnership Group, 2023 has been a year characterised by changes and pressures that are unfamiliar to both the commercial and residential property markets.

The firm, which is based in Boroughbridge, acts for buyers in both the commercial and residential sectors who are based across the county and beyond, which gives it a unique understanding of the markets.

Director, Edgar Seligman from the commercial division of The Property Partnership said: “In the commercial sector it has been reported that the value of industrial, office and retail buildings across the Leeds and North Yorkshire markets has dropped by an average of 5 to 10% since the start of the year and high inflation, interest rates and poor economic growth continue to dominate the national conversation.

“However, we believe this is an over simplistic estimate, as there are intricacies within the sectors, with the value of industrial and offices staying roughly even over the period, but the retail element continues to underperform. In addition, and possibly more relevantly, transactional volumes across all sectors in Yorkshire are down by as much as 70%, when compared to 2022 as a whole.”According to CoStar, £530.9m of deals took place in 2023 compared to £1.39bn in 2022. Edgar added: “Simply put, the price gap between what a landlord is willing to sell for and what an investor is prepared to pay has led to a lack of deals in the market and pricing accurately has proven difficult for many, as the market finds its base – with investors cautious and sellers over optimistic.

“There remain significant volumes of capital chasing industrial and well-located office assets, but anything non-core is failing to transact. The fact that yields have only changed by approximately 15% since the start of 2022, yet the interest rate is 20 times higher than it was at the start of 2022, means that property is less attractive. The margin of return on property versus cash in the bank is therefore lower and debt affordability is significantly constricted compared to the halcyon days for the industrial market of 2021.

“When comparing the commercial and residential sectors, the commercial sector is generally far more cyclical and reactive to broader macro-economic trends, so it is not unusual to see price drops of this sort. You could argue that it is surprising that the falls have not been more dramatic given the steep rise in interest rates, but with the steadying of the money markets in recent months, the future appears far more stable for investors, and the majority of our investor clients are now considering re-entering the market, with lower entry prices providing higher yielding opportunities and better prospects for strong income and capital growth.

“Whilst further small downward adjustments in pricing are possible across the board, especially as increased borrowing costs impact investors needing to refinance, we expect sectors such as the industrial market to bounce back well, as strong underlying fundamentals and rental growth remain. Whilst further shocks cannot be discounted, there are grounds for cautious optimism for investors and opportunities abound.”

In the residential markets across North Yorkshire, there are also many idiosyncrasies. Director, Tom Robinson, said: “The lower end of the market is generally the most volatile in a downturn, especially when interest rates rise. With a 25-year term that is interest only, a 1.5% interest rate on a mortgage of £200,000, equates to £777 per month. With interest rates at 6%, this increases to £1,289 per month. Fortunately, about 74% of UK homeowners are on fixed rate mortgages and this has spread out the timings of those re-mortgaging at the end of their term which has lessened the impact of higher rates on house prices, and probably prevented a UK housing market crash.

“What is worrying, is the fact that 1.4 million of these fixed rate mortgages will come to an end in 2024, which will have a major impact on affordability. It will help maintain a downward pressure on prices, as those who can’t afford their monthly payments sell, and more stock enters the market. Also, buyers tend to attempt to negotiate harder on their purchase prices when the cost of borrowing is high.

“The average house price in England has gone from £311,000 in November 2022, down to £300,000 in April 2023 and back up to £310,000 in November 2023. Despite the usual commentators enjoying the doom and gloom headlines, it is a remarkably steady performance when we look back over the year. In Yorkshire and the Northeast, average prices are now 1.5% higher than 12 months ago, making them two of the country’s best performing regions.

“However, these national and regional averages mask the fact that properties priced in excess of £1m have not performed so well. Achieving a guide price of between £1m and £2m has been increasingly difficult across North Yorkshire in 2023. The Property Partnership’s analysis of higher end sales shows that the actual sale prices achieved in this bracket throughout the year, are transacting at 9% below their guide prices.

“As we look towards 2024, interest rates seem unlikely to rise further and may even reduce during the year. With 1.4 million fixed rate mortgages coming to an end during the year is a major concern and will reduce the chances of any material rises in 2024. The tea leaves are leaning towards either 1% up or 1% down for 2024. Nothing dramatic, which is a welcome thought as we look ahead to next year.”

The Property Partnership Group is an independent, multi-discipline property advisory company.

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