London and Scotland commercial property markets hit most by Brexit

While the UK Commercial property market is showing some signs of a return to a more positive mood since the decision to leave the European Union London and Scotland are lagging behind the rest of the UK, according to a new survey.

Overall, sentiment is recovering slightly after the sharp deterioration seen at the end of the second quarter of 2016 due to the referendum vote, says the latest UK commercial market survey from the Royal Institution of Chartered Surveyors (RICS).

At the headline level, both rental and capital value projections returned to positive territory but remain significantly more subdued relative to the start of the year. Nevertheless, expectations improved to some extent across most parts of the UK, although feedback remains cautious in London.

In terms of the occupier market, national tenant demand returned to growth at the all-property level having stagnated in the second quarter but the sector breakdown reveals the industrial sector was the only area of the market in which occupier demand increased, with the retail and office sectors displaying little change.

Alongside this, availability continued to decline most markedly in the industrial sector, with a net balance of 27% more respondents reporting a decline in supply as opposed to a rise.
Meanwhile, headline availability declined marginally in the office sector and remained broadly unchanged across retail space. When viewed at a regional level, occupier demand increased and availability fell across most parts of the UK.

London, however, is one exception, the report says. In the capital demand fell for the second consecutive quarter, with the office sector reportedly posting the steepest decline. This was met by a modest rise in availability in all but the industrial sector.

RICS put in an extra question for the quarter three survey and asked members if they had seen any evidence of firms looking to relocate away from the UK in response to the EU referendum outcome.

Nationally, a majority of 86% had not seen any such enquiries, although 14% reported they had seen firms looking to relocate. However in Northern Ireland 36% said they had seen evidence of firms looking to move, 27% in the West Midlands and 26% in Central London (26%).

Contributors were also asked if they expect to see an increase in business moving away from Britain over the next two years. On a UK wide basis two thirds of respondents said no but 33% did feel some firms would look to relocate part of their business in response to the Brexit vote.

Again, Northern Ireland at 71% displayed the highest share of respondents who felt firms were likely to move compared to all other parts of the UK followed by central London with 47% who expect some businesses to relocate over the coming two years.

RICS says that despite the uncertain outlook for occupier demand given the current climate, surveyors do expect rents to increase, albeit modestly, in the near term. Nevertheless, projections are only modestly positive in the office and retail sectors, while the industrial area of the market is expected to post reasonably solid gains.

London and Scotland were the only two areas in which near term rent expectations did not move into positive territory. On the investment side of the market, the investment enquiries gauge retraced part of the steep fall seen last quarter.

The foreign demand indicator did move into marginally positive territory across all areas of the market, with the sharp depreciation in sterling commonly cited as a key factor drawing in overseas demand. ‘Interestingly, despite the relatively weak tone across most indicators of the market, central London experienced the sharpest pick-up in foreign investment enquiries compared to all other areas of the UK,’ the report says.

‘Foreign purchasers look to be capitalising on the opportunity to buy prime assets across the capital given the significant discount provided by the weak pound, along with price reductions seen in July and August,’ it adds.

There has also been a shift in members’ perceptions on current valuations. Whereas at the start of the year, 79% of respondents perceived commercial real estate to be overpriced in central London, this proportion fell to 51% in the third quarter. Nationally, 80% of respondents continue to sense commercial property to be either at or below fair value at present, unchanged from the second quarter.

Capital value expectations recovered noticeably at the three and 12 month horizons. For the next 12 months a net balance of 24% more respondents expect capital values to increase, rather than decline. Contributors are most optimistic toward the prospects for capital value growth in the prime industrial and office markets.

At the other end of the spectrum, secondary retail continues to exhibit the weakest expectations. Across London as a whole, capital value projections are pointing to a more or less flat trend over the coming twelve months, although prime industrial and retail units are expected to see some growth in prices.

With the exception of Scotland, where projections are flat, all other areas across the UK are anticipated to post headline capital value gains over the year ahead. During the previous quarter, the proportion of respondents nationally sensing the market had entered the early stages of a downturn increased sharply from 8% to 36%. This proportion fell back to 21% this time out, with the initial shock of Brexit vote fading and some normality returning to the market.