Investment demand in UK commercial property dwindles

Overseas investment enquiries into the UK’s commercial property market dropped by 18% during Q3, among signs that Brexit uncertainty is further weakening market activity. International investment demand declined across the office, retail and industrial sectors in its poorest quarterly performance since Q2 2016, according to the latest research from the Royal Institution of Chartered Surveyors. Overall interest in investing in the UK’s commercial property market fell at a faster pace during the third quarter, with 15% more respondents experiencing a drop in enquiries. Meanwhile, 62% of chartered surveyors acting for agents, councils, firms and organisations sensed that the property cycle is in a downturn phase during Q3. This was up from 53% in Q2 this year, and marks the highest majority recorded by RICS since the survey began in 2015. Occupier demand by sector In the occupier market, net tenant demand slipped to -19%, down from -13% previously. This was largely driven by the retail sector, which recorded a net balance of -60%. Demand for office space also fell during Q3 after deepening to a net balance of -9%, compared to -4% in Q2. The industrial sector was the only category to enjoy growth in tenant demand. However, growth has slowed somewhat, with the net balance standing at +9% (down from +20% in Q2). Availability of leasable space stayed static across industrial in Q3, which RICS highlighted as a “slight departure from the uninterrupted run of declining supply” that had been reported since 2013. The outlook for rents Respondents expected rents for the next three months to rise in the industrial sector. Unsurprisingly, the retail sector is not expected to improve; some 56% of respondents predicted further rent reductions across the market, in the lowest reading since the financial crisis (Q1 2009). In the year ahead, 28% of respondents expected prime office rents to increase. That said, the outlook turned marginally negative for secondary office rents, driven by weakening expectations in London and a largely stagnant picture across the regions. Capital value predictions Capital value expectations for the next 12 months pointed to slower growth across the industrial sector, but remained solid for prime assets. Prime office values were expected to rise modestly, with a slight dip in prices for secondary offices. For the retail sector, negative trends showed no signs of easing, with projections signalling a sharp decline in both prime and secondary retail values over the course of the next 12 months. Tarrant Parsons, economist at RICS, said: “Although a clear majority of respondents now perceive the market to be in a downturn, the fact that capital value expectations are still positive in many parts of the country suggests a relatively soft landing for the commercial real estate sector is anticipated overall. “That said, the fallout for retail is altogether more severe. It remains to be seen what impact the latest Brexit developments have on confidence across the sector, but with the picture unlikely to become clear until into the New Year it may well mean hesitation continues over the near term.” To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette