Q4 2019 RICS UK Commercial Property Market Survey
February 4, 2020
The RICS Q4 2019: UK Commercial Property Market Survey highlights that:
- Prime office and industrial capital value and rental projections upgraded
- Occupier and investor demand continues to rise, albeit relatively modestly, across the industrial sector
- Retail downturn shows no sign of easing
The Q4 2019 RICS UK Commercial Property Market Survey results are consistent with a modestly stronger outlook emerging for rents and capital values over the year ahead. Anecdotal evidence suggests greater political clarity is expected to spur on some pent-up activity which had been placed on hold due to Brexit uncertainty. That said, this is unlikely to change the fortunes of the retail sector which continues to struggle against structural headwinds. Indeed, the latest survey figures show no let-up in the ongoing downturn across the retail portion of the commercial property market.
At the headline level, occupier demand continued to slip in Q4, evidenced by a net balance of -12% of survey participants reporting a decline. However, disaggregating the figures shows the retail sector was the only area to see an outright decline, posting a net balance -58%. Conversely, tenant demand increased in the industrial segment, while respondents cited a flat trend in demand for office space. Alongside this, availability was also reported as unchanged in the office sector, together with a further modest dip in the supply of industrial space. By way of contrast, retail vacancies are still cited to be rising sharply, in keeping with pattern established since early 2017.
Consequently, rental growth expectations remain firmly negative for retail both in the near term and for the next twelve months. For secondary retail space, rents are seen falling by -8% in the year to come (weaker than the -7% decline pencilled in during Q3). For prime retail, the decline is expected to be a little less severe, with respondents projecting a -4% fall (largely unchanged from forecasts made in the previous quarter).
On the same basis, prime office rents are anticipated to rise by roughly 2.5% in the coming twelve months, having received a noticeable upgrade on expectations for 1% growth returned in Q3. The outlook is flat for secondary office rents, although this marks an improvement on the slightly negative projections put forward by respondents last time. Across the industrial sector, rents are forecast to rise by nearly 4% in prime locations (upwardly revised from around 2.5% in Q3), while expectations stand nearly 2% for secondary. Outside of the three traditional market sectors, respondents expect rents for prime multifamily residential accommodation to increase by a little over 3% in the coming twelve months.
In terms of the regional breakdown, twelve-month projections for London office rents saw an uplift over the quarter, with a net balance of +49% of respondents now expecting an increase (compared to +17% in Q3). Furthermore, expectations moved out of negative territory for secondary office rents in the capital for the first time since 2016. Elsewhere, rental growth expectations strengthened in the prime office and industrial sub-markets right across the country. Meanwhile, no real improvement was evident across any regional retail markets, which continue to exhibit a negative twelve-month rental outlook.
With regards to investment, headline enquiries fell slightly at the national level, as the net balance came in at -11% compared to -15% in Q3. Although this was once again largely a result of the slump in demand for retail properties, a marginal decline was also reported in investor interest across the office sector. At the same time, investor demand rose modestly for industrial units, albeit enquiries from overseas buyers were unchanged over the survey period.
Despite this, capital value expectations were adjusted higher for both prime and secondary industrial assets for the coming twelve months. What’s more, prime office capital values now exhibit a firmer outlook relative to Q3, although little change is anticipated for office values in secondary locations. Capital values are still seen falling sharply for both prime and secondary retail properties at the twelve month horizon, with the former holding up slightly better than the latter.
Drilling beneath the national averages shows a similar view is held by respondents regarding the twelve month outlook for capital values within all UK regions. Indeed, the office and industrial sectors (particularly prime) are expected to deliver price gains right across the UK. At the same time, sentiment remains downbeat on the prospects for retail capital values in each region.
Given this mixed sectoral picture, feedback is highly varied when it comes to current perceptions on the property cycle. Even so, whereas a majority of 62% of respondents nationally sensed the market was in some stage of a downturn in Q3, this proportion eased to 44% in the latest results. On the flipside, 29% of respondents now classify the market as being in an upturn phase, representing a noteworthy increase on only 17% taking this view last time.