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Improving UK commercial property market falters

After rising over the previous six months, overall tenant demand retreated in the third quarter, moving into negative territory for the first time in a year. In addition, demand in London's commercial property market, which had looked much stronger, failed to increase. Surveyors attribute this to the uncertain outlook for the wider economy which is impacting negatively on demand.
As tenant demand fell back, available space continued to rise, with 15% more surveyors reporting available space rose rather than fell over the last three months. Available space picked up fastest in the retail sector, with a net balance of 30%. The retail sector also saw the largest drop in demand for space.
Inducements rose over the last three months, as landlords looked to entice tenants into deals. At a net balance of 20%, inducements are now increasing at their fastest pace since the second quarter of 2010 and surveyors note that some landlords are incorporating more flexibility into their leases.
Falling demand and rising availability impacted on rental expectations, which weakened over the quarter, moving deeper into negative territory, minus 15%. Respondents were least optimistic for office rents, which fell at the fastest pace for two years, minus 23%. Previously, this sector had displayed a greater level of resilience. The one area which continues to show a positive trend for future rents, albeit a flatter one than earlier in the year, is the central London office market.
Meanwhile, demand from investors was weaker across all sectors and regions of the UK except for London, where the balance managed to remain in positive territory, with 27% more surveyors reporting a rise rather than fall in investment demand. One factor continuing to underpin this level of interest in real estate in the capital is the appetite of foreign investors.
‘While the London commercial market is still holding up relatively well, some of the positive momentum appears to have faded in the capital over the last few months, reflecting the wave of negative news flow surrounding both the prospects for the UK economy and the sovereign debt crisis in Europe,’ said Simon Rubinsohn, RICS chief economist.
‘Confidence is clearly critical for the whole of the real estate sector and in the near term there is little reason to believe that it is likely to improve. Against this background, any recovery in rents is likely to prove elusive and capital values away from London look set to remain under pressure,’ he added.