After a tough period over 2022 and 2023, the commercial property market can look ahead to consolidation and the prospect of a recovery emerging in 2024, according to Knight Frank.
Knight Frank Chief Economist, Ben Burston, said the sustained pressure of higher rates has naturally put pressure on asset values and this is still playing out to varying degrees. “Part of the uncertainty has been a disconnect between formal valuation metrics and market sentiment,” Mr Burston said.
“However, with more deal evidence now coming through and formal valuations likely to be adjusted further in the December cycle, we expect the gap between sentiment and formal valuations to erode substantially over the next six months so that by mid-2024 the picture will be clearer for buyers and sellers alike, helping to restore confidence and liquidity.”
Mr Burston said that while reductions in asset value are never welcome, the flipside is the re-emergence of value looking forward. “Higher yields act to reset the market and provide a more attractive entry point for investors, generating the prospect of higher returns,” he said. “This is clearly illustrated when we assess historic market cycles and the performance achieved after pricing is reset in the aftermath of interest rate hiking cycles.”
He said the period immediately after the conclusion of previous rate hike cycles ending in 1994, 2000 and 2010, was in each case a very attractive time to buy, achieving above-average returns over the following five years.
“This is not to say that history will repeat, and investors cannot take for granted that interest rates will fall exactly as anticipated,” he said. “But careful asset selection will maximise the chances of strong performance whether it is achieved through income growth or boosted by a return to yield compression as interest rates revert in 2024-26.”