Investor and occupier demand for commercial property edges up in UK

Both investor and occupier demand in the UK’s commercial property market edged up during the third quarter of 2017 but there is more caution around the central London market, the latest analysis report shows.

There is also significant difference between sectors with industrial clearly outperforming the others and retail the weakest, according to the commercial property market survey from the Royal Institution of Chartered Surveyors (RICS).

It also reveals that rent expectations are upbeat for industrial space but flat for offices and negative for retail although overall that has been a pick-up in both domestic and foreign investment demand at a national level.

However, London continues to display more cautious sentiment with 73% of respondents in central London sensing the market to be in some stage of a downturn.

Overall in the third quarter investment demand for commercial property continued to pick up, with 20% more respondents seeing an increase rather than decline in investment enquiries, up 10% in the second quarter of the year.

As domestic interest increases, interest from overseas buyers also rose across all areas of the market during the third quarter and alongside this, near term capital value expectations point to strong growth across industrial assets, a modest rise in office prices, and little change for values across the retail sector.

Occupier demand in the quarter held steady at the headline level, with 5% more respondents seeing an increase as sentiment picks up. Looking at individual sectors, demand has increased strongly for industrial space and stabilised in the office sector, having fallen in the second quarter while demand continued to fall for the second consecutive quarter in the retail sector.

On the back of sluggish demand in the office sector, landlord incentive packages on offer to tenants have no reportedly risen in five successive periods. Retail inducements also picked up, marking the second quarter running in which they have done so. By way of contrast, incentives continued to decline in the industrial sector, the report points out.

Given the occupier demand picture, the report says it should be no surprise that near term rent expectations indicate firm growth in the industrial sector, a broadly flat picture for office rents, and a marginally negative one for retail at the UK level.

Looking ahead, over the next 12 months rental expectations are positive for both prime and secondary industrial space, prime offices and to a lesser extent prime retail space. The outlook for secondary office space remains flat. Conversely, the year ahead rental expectations for secondary retail are firmly negative, with rents still anticipated to decline.

With regards to the regional breakdown, all sector rent expectations in the near term are generally positive across most parts of the UK with London again being the exception. In the capital, negative expectations in office and retail cancel out positive expectations for industrial rent.

London is in fact displaying more cautious sentiment than virtually all other parts of the UK in the near term including across demand and new development starts, although availability and inducements have picked up. While investment trends appear a little more resilient, headline capital value expectations are now more or less flat in the capital, the report explains.

In terms of valuations, across the UK as a whole, a strong majority of contributors, some 65%, sense the market is fairly valued at present, this is unchanged from the second quarter. Central London continues to exhibit the highest proportion of respondents viewing the market to be overpriced to some extent at 67%.

Meanwhile, 37% of respondents from the South East are now of the opinion that values are stretched relative to fundamentals, a steady increase on 16% who were taking this view three quarters ago.

Although views remain mixed, the largest share of contributors nationally, some 30%, feel conditions are consistent with the middle stages of an upturn but in central London 73% of respondents sense the market to be in some stage of a downturn.

‘The feedback to the survey reflects some of the broader macro issues, with the underlying momentum in the occupier market a little firmer further away from the capital. This is also mirrored in valuation concerns with around two thirds of respondents viewing the London market as being dear,’ said Simon Rubinsohn, RICS chief economist.

‘A key issue going forward will be how the market responds to the likely first interest rate rise in a decade next month. Given that expectations are only for a modest tightening in policy, the likelihood is that it will be able the weather the shift in the mood music. But this remains a potential challenge if rates go up more than is currently anticipated,’ he added.