The heightened sense of caution is visible across both investment and occupier sides of the market, with uncertainty pushing rental and capital value projections into negative territory, according to the latest commercial property market survey from the Royal Institution of Chartered Surveyors.
It shows that and increasing share of respondents across the UK now feel the market is in an early downturn phase and the 12 month capital value and rental projections have now moved into negative territory.
On a UK wide basis, occupier demand failed to rise for the first time since 2012. The headline net balance fell from +21% previously to a reading of zero in the second quarter of the year.
Declines were reported in the office and retail areas of the market but demand proved somewhat more resilient across the industrial sector. The regional breakdown shows the occupier demand gauge moderated across all parts of the country, although the shift was most noticeable in London.
Alongside this, availability remains constricted, with the supply of leasable space more or less unchanged in the office and retail sectors during the second quarter, while industrial availability continued to decline.
Worries over a potential hit to business confidence, caused by political and economic uncertainty, appear to be reflected in respondents’ rental outlook. This is especially the case over the shorter term. Indeed, the headline three month rent expectations net balance dropped from +26% to -7% in the second quarter.
The office and retail sectors experienced the steepest decline, with the reading for both now comfortably in negative territory. In the industrial sector, although the net balance softened notably, it remains positive given the very tight supply and demand conditions.
When the results are disaggregated, the rental outlook is most negative in London. Over the next 12 months, rents are projected to fall by around 3% at the all-sector level. Within this, rents across the secondary retail sub market are expected to come under the most significant downward pressure.
The survey report points out that the weakness in demand is perhaps even more visible on the investment side of the market. During the second quarter the investment enquiries series fell sharply, posting a net balance of -16%, down from +25% in the first quarter of the year. What’s more, all traditional sectors covered in the survey experienced a drop-off in investor interest.
Foreign investor demand declined at an even greater rate, as the net balance fell to -27%. While respondents in virtually all parts of the UK noted a decline in overall investment enquiries, the trend was again most pronounced in London. In fact, at -41%, the investment enquiries gauge for the capital was the weakest since 2009.
Back at the UK wide level and, despite a softening demand backdrop, the supply of property for investment purposes still remains tight. Indeed, investable stock reportedly declined for an eighth consecutive quarter. In keeping with trends over much of the past two years, the lack of supply remains most apparent in the industrial sector.
The survey report also points out that even though low supply will provide a certain degree of support to prices, respondents do now expect capital values to fall over the year ahead across almost all areas of the market. Prime industrial assets are the sole exception, where the outlook is flat for the time being.
At the other end of spectrum, values in the secondary retail and office segments are expected to see the steepest decline, recording a net balance of -29% and -23% respectively. In London, 12 month capital value expectations are steeped in negative territory across the board.
A net balance of -35% more surveyors anticipate a decline in all-property prices over the next year. As recently as the fourth quarter of last year, a balance of +73% more respondents expected capital values to rise, rather than fall, on a 12 month basis.
Elsewhere, 12 month price projections are mostly negative across secondary markets while respondents expect prime segments to hold up a little better. At the three year time horizon, however, all areas, with the exception of Scotland and London, are projected to see capital values return growth.
Although opinions are mixed, the largest share of respondents across the UK, 36%, feel the market is now in the early stages of a downturn. All parts of the UK saw an increase in the proportion of contributors sensing the market is turning down. London exhibits the highest proportion, with 54% of respondents taking this view.
In an extra question included in the second quarter survey, respondents were asked their views on the potential impact of the changes to Stamp Duty contained in the March 2016 budget. Across the UK 57% feel the change is likely to have little impact on transaction volumes, while 24% believe it could reduce volumes. Only 4% expect the policy to boost transactions, with 15% unsure either way.
In the capital, the proportion who feel the new regime will reduce transactions came in a little higher than the national average, at 43%. That said, a significant share, 42%, think it will have little impact.
When asked if the higher tax payable on property purchases over £1.05million will be reflected in lower deal prices, 50% responded Yes, 31% answered No, and 19% did not know.
The West Midlands at 70%, Northern Ireland at 65% and the South East at 61% displayed the highest proportion of respondents who sense the higher tax burden will reduce deal prices.
