Q1 2019 : UK Commercial Property Market Survey
June 4, 2019
The Q1 2019 UK Commercial Property Market Survey confirms that Brexit uncertainty continues to hinder the market. The headline bullet points are:
- Headline indicators on domestic and overseas investment demand turn slightly negative
- Occupier demand continues to fall sharply across the retail sector
- Split between prime and secondary offices remains evident Headline indicators on domestic and overseas investment demand turn slightly negative
“The Q1 2019 RICS UK Commercial Property Market Survey results show conditions remain highly varied at the sector level. Indeed, solid fundamentals continue to drive growth in the industrial segment while the struggling retail sector shows little sign of improvement. Alongside this, anecdotal evidence suggests the Brexit impasse is, to a greater or lesser degree, weighing on investor and occupier decisions across the board.
The survey’s occupier demand indicator posted a net balance of -13% at the headline level, unchanged from last quarter and consistent with a modest decline in overall tenant enquiries during Q1. That said, when broken down, all of this decline stemmed from the retail sector, where a net balance of -57% of respondents reported a fall. Demand for office space was broadly stable, having weakened slightly in Q4. Meanwhile, the industrial sector continued to see a steady rise in tenant demand.
Alongside this, vacant space across the industrial sector continued to edge down, although (in net balance terms) the decline in Q1 was the most modest since 2013. By way of contrast, availability rose sharply within the retail sector once again, an ongoing trend increasingly evident over the past eighteen months. Respondents also cited a slight rise in office availability during Q1, the second consecutive quarterly increase. Given these dynamics, it is not surprising that feedback to the survey suggests retail and office landlords opted to increase the value of incentive packages on offer to occupiers.
With regard to the outlook for rents, contributors are still anticipating further growth across both prime and secondary areas of the industrial market over the next twelve months. For offices, there remains a clear split between prime and secondary, with the former expected to deliver steady rental growth, while projections are marginally negative across the latter. Expectations are pointing to a further fall in both prime and secondary retail rents at the twelve month and three year time horizon.
When viewed at the regional/country level, the pattern of positive rental projections within the industrial sector and negative expectations for retail is replicated across all parts of the UK. The office sector is more nuanced, although prime office rents are seen rising across the majority of regions. For secondary offices, rents are anticipated to decline in London and remain flat in the South of the country as well as in the Midlands. Meanwhile, marginal growth is expected for secondary office rents in the North.
In each quarter since the Brexit vote took place, survey participants have been asked if they have seen any evidence of firms looking to relocate at least some part of their business as a result. In each of the two previous quarters, the proportion reporting they had seen signs of this type of activity came in at around 24%. Interestingly, however, this picked up to 33% in the latest results. Going forward, a slim majority (53%) of respondents nationally do now expect relocations to occur. Of course, whether or not firms do decide to relocate, will still depend on how the negotiations unfold from here on.
In the investment market, enquiries declined at the headline level for a second successive quarter, with the net balance slipping to -15% from -9% previously. Although the retail sector was responsible for much of this decline, buyer enquiries also fell modestly for offices, with the net balance of -11% representing the poorest reading since Q2 2016. Meanwhile, the investment enquiries indicator remained in positive territory across the industrial sector, albeit to a lesser extent than at any other point over the past two years. What’s more, overseas investment demand declined slightly across each area of the market during Q1.
As was the case last quarter, the supply of property available on the sales market remained more or less unchanged at the headline level according to the latest results. Despite supply holding steady and demand deteriorating, respondents left capital value projections relatively unaltered compared to the Q4 figures. As such, prime industrial assets are still envisaged posting the strongest capital value gains on a sectoral comparison over the coming year, while prime offices are also seen chalking up solid growth. The outlook for secondary industrial values is still slightly positive, but expectations for secondary offices point to a marginal decline over the year to come. On the same basis, capital values are projected to fall significantly for both prime and secondary retail units across virtually all parts of the UK.
In London, the divide between prime and secondary offices is slightly wider than at the national level, with expectations for secondary slipping deeper into negative territory in Q1 (from a net balance of -11% to -21%). Elsewhere, the secondary office market displays a flat to marginally positive capital value outlook throughout the rest of the country.
Back at the national level, 52% of respondents continue to sense the market is in the early to middle stages of a downturn, virtually unchanged from Q4. In London, 63% of contributors view the market as in some stage of a downturn, although 14% now feel conditions are now stabilising (up from 6% in the previous quarter)” .