Cash flow pressures keep surveyors gloomy on commercial outlook

Rental decline, subdued interest from overseas investors and the continued high cost of debt has left surveyors across the UK downbeat on the commercial property market. The latest RICS Commercial Property Market Monitor, which surveys more than 600 real estate professionals, showed a continued negative outlook, with almost 60% perceiving it to be in a downturn. A quarter said they believed the bottom of the cycle had been reached, while an optimistic few (16%) thought the market was in the early stages of an upturn. The continued pessimistic view of the market comes as three-quarters of those surveyed expected pressure on corporate cash flows to intensify over the coming months. That continued pressure is leading to weakened occupier demand, rental pressures and increases in incentives in a bid to get deals over the line. The survey, which measures reports of increasing versus decreasing reports of demand to create a net balance figure, showed respondents were marginally gloomier about occupier demand in Q3 than Q2, posting a net balance of -12% across the commercial sector. Despite recent updates from landlords on leasing activity across both office and retail, the RIC’s monitor found that both sectors continued to drag real estate down, with net balances of -19% for offices and -25% for retail. The lack of demand, coupled with rising vacancy rates, is leading to an increase in incentives with a whopping 40% of respondents reporting an increase in inducements, such as rent free periods, for offices and 34% for retail. Twelve-month rental growth projections were mixed across the various sub-sectors. Across the office sector, the divide between prime and secondary remains stark. While prime offices are anticipated to deliver a small uplift in rental values over the year ahead (21% net balance), rents are seen falling relatively sharply across secondary office space (-47%). For the retail sector, a net balance of -13% of respondents expects prime rents to fall with the outlook altogether more downbeat across secondary retail (net balance -51%). Investor demand trends also continue to be subdued, with overall investment enquiries posting a net balance of -21% – the fifth consecutive quarter where this indicator has been in negative territory. Office and retail again led the way in terms of negativity, at -33% and -35% respectively. The RICS monitor also revealed a continued decline in interest from overseas investors across all sectors of the market. Fresh research from Legal & General Investment Management this week found that there was an increasing volume of capital targeting the UK, but that it anticipated that it would remain on the sidelines until fair value is perceived. It expects that value to come through as more motivated sellers come to market, driven by refinancing pressures and the expected increase in defined benefit pension schemes offloading riskier assets. RICS senior economist, Tarrant Parsons, said: “The UK commercial property market continues to feel the effects of higher interest rates, still well above target inflation, and weak prospects for economic growth over the near term. “Investment activity remains subdued, while occupier market trends are also now clearly softening. This general pattern is reported right across the UK, with secondary office and retail premises seeing the brunt of the downturn, driven by both structural and cyclical dynamics.” To send feedback, e-mail samantha.mcclary@eg.co.uk or tweet @samanthamcclary or @EGPropertyNews Source, all charts: RICS Image © Geoffrey Swaine/Shutterstock