Q3: UK Commercial Property Market Survey
November 1, 2019
The Q3 2019: UK Commercial Property Market Survey highlights that:
- Enquiries from investors and occupiers edge down across the office sector, retail remains very weak
- Industrial rents and capital values still anticipated to rise, albeit expectations have moderated
- 62% of respondents now view the market to be turning down
The Q3 2019 RICS UK Commercial Property Market Survey results point to a deterioration in sentiment over the period, with 62% of respondents now sensing the market is in the downturn phase of the property cycle. That said, notwithstanding the structural challenges across the retail sector, many contributors feel the Brexit impasse has become increasingly detrimental to market activity. As such, anecdotal evidence suggests a resolution to the uncertainty could potentially release some pent up demand further ahead.
In the occupier market, tenant demand reportedly fell at the headline level once again, with the net balance slipping to -19%, from -13% previously. When disaggregated, the retail sector continues to drive much of the overall decline (net balance -60% compared to -59% in Q2). However, demand also fell in the office sector during Q3, albeit the net balance reading of -9% is indicative of only a modest decline.
Meanwhile, demand for industrial space continued to rise, although even this increase was only marginal, as the net balance came in at +9% (down from +20% in Q2). Alongside this, the availability of leasable space was more or less unchanged across the industrial sector, marking a slight departure from the uninterrupted run of declining supply being reported since 2013. At the same time, vacancies are still rising sharply across the retail portion of the market, while availability of office space also ticked up again. This prompted another increase in incentive packages on offer to tenants in both instances.
Over the near term, industrial rents are still seen rising, even if growth may cool somewhat compared with earlier in the year. Projections remain steeped in negative territory across the retail sector, while office rents are expected to see very little change over the next three months.
Slightly further out, at the twelve month horizon, prime office rents are expected to increase, with a net balance of +28% of respondents envisaging positive growth at the national level. The outlook has turned marginally negative for secondary office rents however, driven by weakening expectations in London and a largely stagnant picture across the regions. By way of contrast, the industrial sector, particularly in prime locations, continues to return solid rental growth projections for the coming twelve months in all parts of the UK. Unsurprisingly, rents are foreseen falling further across the retail sector, both in prime and secondary locations, with expectations coming in even weaker than those returned in Q2 at the headline level.
On the investment side of the market, enquiries fell at a slightly faster pace than in Q2, in net balance terms, with 15% more respondents reporting a decline (as opposed to an increase) in the latest figures. Overseas investment demand declined across all three sectors covered by the survey, and the headline net balance of -18% represents the poorest reading since Q2 2016. The supply of property available on the sales market was relatively unchanged for a fourth straight quarter, although an increase in the retail sector was offset by falling supply in the office and industrial portions of the market.
Capital value expectations for the coming twelve months point to growth slowing across the industrial sector, but remaining solid for prime assets nonetheless. Prime office values are seen rising modestly, although expectations are consistent with a slight dip in prices for secondary offices. For the retail sector, the negative trends of recent quarters show no signs of easing and projections continue to signal a sharp decline in both prime and secondary retail values over the course of the next twelve months.
Reflecting a slightly more downbeat tone to the Q3 results, 62% of survey participants are now of the opinion that the market is in the early to middle stages of a downturn. This is up from 53% in the previous quarter and is the highest proportion sensing the market to be turning down since this series was introduced in 2015. Furthermore, beneath the national level, a majority of contributors are taking this view across all of the 12 UK regions/countries covered.
That being said, all-sector average capital value expectations are only narrowly in negative territory for the year ahead, and longer term expectations depict a largely similar pattern at the three year horizon. On that basis, the perceptions of respondents appear to point to the current ‘downturn’ being consistent with a relatively soft landing for the commercial real estate sector overall, even though the fallout for retail is altogether more severe.