London offices hint at wider recovery in latest RICS survey

Office demand is rising for the first time since early 2022 but there is a growing split between London and the regions, the latest RICS UK Commercial Property Monitor has revealed. A net balance of +6% of contributors to the Q1 survey reported an increase in occupier demand across the office sector in the first quarter. However, this rise was entirely driven by central London, where the net balance moved from +3% in Q4 to +40% in Q1. By contrast, the picture elsewhere in the UK was either flat or slightly negative for office demand. Drilling further into the sector, 52% of contributors said they had witnessed an increase in the volume of office tenants looking to downsize over the past 12 months. Close to 90% reported seeing either significant or modest levels of office repurposing to other uses of late (up from 86% when this question was last included in 2021). Looking ahead, rents are still seen falling across secondary offices over the year ahead (net balance -36%) as remote working and the Minimum Energy Efficiency Standard regulations continue to impact the commercial office sector. Prime office sites are expected to see rental increases (net balance +42%, up from +30% in Q4 2023) as tenants increasingly appear to prefer prime, energy-efficient space to minimise immediate costs as well as potential future retrofitting costs. Regionally, London was ahead of the rest of the country, with rent expectations at +54%, reflecting its significant lead in tenant demand. This was the strongest reading for central London prime office rents since Q1 2016. In the investment market, capital value expectations for prime offices are improving (net balance +25%), but contributors expect values to continue to slip across secondary offices. John Knowles, Colliers’ head of national capital markets, said in his response to the survey that the market was “still very lethargic apart from super prime and is becoming more polarised on a daily basis”. Retail Demand for retail space is also showing stronger momentum in London than other parts of the UK.   Prime rents are expected to hold steady over the next 12 months (net balance +3%), while secondary retail rents are still expected to fall a little further, according to a net balance of -42% of survey respondents Retail investment demand is still struggling for momentum, albeit the Q1 net balance of -18% was a little less subdued than last quarter’s -34%. Industrial The only sector to see a rise in investment enquiries during Q1 was industrial, with the net balance up to +14% from +2%. In addition, the occupier demand indicator was at its most positive since Q3 2022, with a net balance of +14%. Rents are expected to rise over the next 12 months for both prime and secondary industrial assets, posting net balances of +56% and +22% respectively. Overall, the survey suggested an improvement in tenant demand across sectors, with a net balance of 4% from -7% at the end of 2023. The headline demand gauge for the investment market moved into neutral territory, with a net balance of -4%, against -19% last quarter. However, the report noted that international investment demand was flat to modestly negative across all mainstream sectors. Confidence remains low Tim Edghill, principal at Space Asset Services, said in his response to the survey that “nervousness remains” despite “a general view that we are at the bottom of the market”. “First, because with a fragile global economy it is unclear how long we will be at the bottom and second because vendors and owners still have an unrealistic view of asset value and so values need to drop before a more active trading market will be realised.” Sean Dempsey, director of asset management at investment company Boultbee Ldn, said: “There is definitely a feel of imminent change.” “However, confidence remains low and fundamentals such as high development costs will continue to suppress activity,” he said. “Conversely, a lack of grade-A and prime supply and the recent period of inflation may result in an earlier than expected growth in rents.” RICS’ view RICS senior economist Tarrant Parsons said: “Although sentiment remains relatively cautious regarding the near-term outlook across the UK commercial property market, the latest survey results do show some signs of recovery coming through. For one, occupier demand growth now appears to be gaining traction slightly, supported by the broader economy seemingly returning to growth following a brief recession late last year. Moreover, the prospect of interest rate cuts later this year have already led to an easing in credit conditions across the sector, marking the first such improvement in our feedback since 2021. This should begin to support investment market activity as the year wears on, which, in turn, will likely see a more stable picture emerge for headline capital values.” Dominic Collier, senior public affairs officer at RICS, said: “We welcome the latest survey results indicating signs of recovery starting to emerge. Yet at the same time, the uncertainly around non-domestic MEES is continuing to impact the sector. RICS is urging for decisive action in setting clear and achievable MEES targets. “The current proposed timeline and trajectory are increasingly viewed as unrealistic, and there are concerns about the lack of implementation mechanisms. Without action, there is a risk that up to 50% of commercial buildings could be stranded by 2035. RICS is advocating, collaborating and engaging with key stakeholders such as the Department for Energy Security and Net Zero, and the Built Environment Committee, to drive meaningful progress and help establish clear, realistic, credible and forward-looking non-domestic property MEES targets.” Survey questionnaires were sent out on 13 March 2024 with responses received until 12 April 2024. Respondents were asked to compare conditions over the latest three months with the previous three months as well as their views as to the outlook. A total of 554 company responses were received. Click here to download the report.