5 things the commercial property market should consider in 2023

The 2022 commercial property market was mixed, having started strong with an uptick in transactions but then faced increasing inflation, government instability, and rising interest as the year went on. There was also a drop-off in activity, with the availability and cost of debt hampering deals, so what does this tell us about 2023? There are five key areas which we should consider: 1. Transaction Levels With inflation and interest rates remaining high in the mid-term, transaction levels are likely to slow in the first half of 2023. UK hotel transactions totalled £3bn in 2022, according to Knight Frank, and its research found that the first half of the year was strong, with momentum from Q4 2021 continuing into 2022. However, the rising cost of debt and the growing threat of an economic downturn reduced levels of investment in the latter half of 2022. This will continue into 2023, and we may also see some pre-emptive sales, as lenders put the pressure on. The sector is still resilient though, and I believe this slow-down will be short-lived and deal activity will return. 2. Interest rates As interest rates remain high, pressure will be put on leveraged commercial asset owners. In turn, it may force covenant tests, which could lead to an asset sell-off to rebalance portfolios and shore up the balance sheets of landlords. 3. Inflation At the same time, high inflation will partly offset increased borrowing costs for those landlords with inflation-linked rents. Those reviews typically occur every five years, and so the tangible benefit of inflation-linked income may be too far down the road for some landlords to be able to wait. This means that they could be forced out of the market. 4. Squeezed profit margins A hands-on approach to cost management and managing the cost base will continue to be a focus in 2023. As well as negotiating with lenders to amend debt facilities, hospitality operators will be looking at whether rising operating costs can be passed on to consumers to deliver a much sought-after inflation hedge. 5. Who is investing? We also should expect a shift over the coming months towards buyers being predominantly cash-rich UK investors and USD-based offshore investors, both seeking to take advantage of the squeeze on sellers with high levels of variable rate debt. Over the past few months, the pound has fluctuated against the dollar, which has encouraged USD-denominated investors to capitalise on UK assets. In addition, they have been less likely to liquidate UK assets, repatriating the proceeds into USD and limiting the risk of a major sell-off. With that being said, will any other markets see the UK as a good bet? Despite the challenges and the pressure on the commercial real estate market from economic uncertainty, for mid to long-term patient investors - especially cash buyers - 2023 is still set to present opportunities. Those who are willing to weather the storm and sit tight on their investments, will reap the benefits over time. Tough times are still ahead, however, I remain hopeful yet realistic for this year and believe there will still be strong potential for further activity and growth.

5 things the commercial property market should consider in 2023

By Viv Watts, property investor and co-founder of AGO Hotels

Read Next

How non-bank lenders can take up the baton in the construction industry

How can rent guarantors help level the rental sector playing field

Commercial Rent (Coronavirus) Act 2022: an end to a temporary moratorium

How non-bank lenders can take up the baton in the construction industry

How can rent guarantors help level the rental sector playing field

Commercial Rent (Coronavirus) Act 2022: an end to a temporary moratorium

Crest Nicholson launches show homes in Warwickshire

Peel NRE submits plans to regenerate Fiddler’s Ferry

Barberry celebrates record profits of £17.1m

RLAM sells Preston leisure park to British Land for £51.5m

BoE raises interest rates to 4.25%