Lenders Still Favour Beds And Sheds — But Good Luck Finding Debt For Your Secondary Office

As core UK inflation continues to rise — up from 6.2% to 6.8% today — and the Bank of England seems set to push interest rates up to or beyond 5%, where do you find value in British real estate?

The answer, according to Savills' annual survey of property lenders, seems to be exactly where it was before, in beds and sheds, with the prime office market on the cusp of becoming a net attractor of lender's money.

However, the firm warned that the pricing mechanism for non-prime assets is sticky in some markets, which could still cause headaches. Survey data also showed a wide spread of views among lenders — itself a sign of an uncertain, thinly populated market.

“Typically, we would expect market views to be broadly aligned, but the disparity underlines some of the fundamental challenges around the future outlook for pricing,” Savills Head of UK and Cross Border Valuation Nick Harris said, speaking at Savills 35th Financing Property presentation.

Harris noted that this divergence in opinions has impacted both pricing and transactional volumes. For the market to progress, this dislocation of expectation needs to narrow. 

For the time being, the beds-and-sheds combination remains overwhelmingly appealing to lenders.

“The rationale for investing in logistics remains the same with online retail and onshoring to support demand moving forwards, resulting in the vacancy rate likely to reduce to 4% in 2024 and prime rental growth to average at 6% a year,” Savills head of commercial research Mat Oakley said.

Secondary offices was the least favoured sector among lenders, worse even than secondary retail. But Oakley stuck up for the office sector. 

“There are definitely challenges for office demand but these have been largely overstated, particularly when you take into consideration employment growth and density reduction," he said. "In London we are seeing 52% of requirements looking for more space with only 22% looking for less. We have also seen an uptick in prime office rents over the last three years in both London and the UK’s regional markets, which demonstrates the underlying strength of the sector.”