Q2 2019: UK Commercial Property Market Survey
July 29, 2019
The Q2 2019: UK Commercial Property Market Survey highlights that:
Retail pressure shows no signs of abating. Other headline findings suggest:
- Rents and capital values expected to fall further across prime and secondary retail markets.
- Demand continues to outstrip supply in the industrial sector.
- Slim majority of respondents feel the market is in a downturn.
The Q2 2019 RICS UK Commercial Property Market Survey results show the well established trends of recent quarters remain firmly in place. Indeed, the retail sector continues to display firmly negative sentiment in the face of the structural shift towards increased online spending. Meanwhile, solid demand growth is still being reported across the industrial sector, with this pattern evident across all parts of the UK.
In terms of the occupier market, the tenant demand indicator remained in negative territory for a fifth quarter in succession at the headline level. Even so, the net balance reading of – 59% in the retail sector was again responsible for pulling the all-sector average below zero. In the office sector, respondents cited little change in occupier demand over the quarter, while tenant enquiries for industrial space continue to rise smartly.
Given this, the availability of vacant industrial space fell back once more during Q2, although the pace of decline has slowed over the past year. At the same time, the availability of office space edged up for a third successive report. Unsurprisingly, the retail sector posted the most significant rise in availability, with a net balance of +52% of survey participants reporting an increase (the most elevated figure since Q2 2009). As a result, both retail and office landlords raised the value of incentive packages on offer to tenants, with the increase most pronounced for the former.
At the headline level, near term rental expectations were broadly unchanged compared with Q1 (net balance -7% compared with -9% previously). As such, this measure continues to suggest all-sector rents will dip marginally over the coming months. That said, all of the negativity is stemming from the retail sector, which posted a net balance of -53%, while the outlook appears relatively flat for office rents (net balance +2%). Meanwhile, contributors envisage the industrial sector delivering further solid near term rental growth.
Regarding the next twelve months, respondents continue to foresee prime industrial rents rising by roughly 3%, with expectations for secondary slightly more modest, standing around 1.5%. For prime offices, approximately 2% rental growth is expected, while the outlook remains flat to marginally negative for secondary office rents. On the same basis, prime and secondary retail rents are seen falling by around 3.5% and 7% respectively.
Outside of London, the regional outlook remains very similar to that at the national level, with both prime and industrial sector rents expected to rise right across the UK. At the other end of the spectrum, rental expectations for the retail sector (both prime and secondary) remain comfortably negative within all areas.
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 Q2, 32% stated they had seen evidence of this, unchanged from Q1, but up from 23% six months ago. Going forward, a slim majority (52%) of respondents nationally do expect relocations to occur although this will very much depend on how the Brexit process unfolds from this point.
In terms of investor demand, the headline net balance came in at -9%, slightly less negative than in Q1 (-15%). Beneath this figure, growth in the industrial sector was offset by a fall in demand for retail units, while the trend was flat for offices.
For the third quarter in a row, demand from overseas investors fell, to a greater or lesser degree, across all areas of the market. Alongside this, the supply of property available on the sales market held steady at the headline level, although an increase was reported across the retail sector.
Over the next twelve months, respondents foresee further solid growth in capital values across the prime industrial and office sectors. Secondary industrial assets are also anticipated to chalk up further, albeit modest, gains although the outlook is broadly flat for secondary offices. In contrast, retail capital value projections remain entrenched in negative territory.
From a regional perspective, the East Midlands, along with Scotland and Northern Ireland returned the most elevated expectations for capital value growth in the prime office sector. At the same time, the East Midlands, Scotland and the West Midlands display the firmest assessment on the outlook for prime industrial values for the coming year. Conversely, retail capital values are anticipated to decline at the sharpest pace in the North East and Greater London in the next twelve months.
Meanwhile, 53% of respondents nationally feel the market is in some stage of a downturn (with this proportion virtually unchanged over the past three quarters). The share of contributors taking this view is slightly higher in London, at 63%. Nevertheless, over 50% of respondents also feel the market is turning down in the East Midlands, East Anglia, Scotland, the South East and the South West. Nevertheless, the overall outlook for the market is still consistent with a ‘soft landing’ at this stage.