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27 JUL 2017

Economic and political uncertainty clouding UK commercial property outlook

Occupier demand is declining in the office and retail sectors of the UK commercial property market, but conditions in the industrial segment remain firm, according to the Q2 2017 RICS UK Commercial Property Market Survey.

View and download the full survey

Survey highlights

  • Rent expectations remain solid for industrial property, but decline slightly for office and retail.
  • Occupier demand at an all sector level flatlines in Q2, reflecting a more cautious outlook.
  • Capital values still anticipated to rise, but more modestly than previously.
  • Shift to online shopping supporting demand for industrial space and contributing to retail’s decline.

Occupier demand

Occupier demand was broadly flat at the all-sector level during Q2 of 2017, following only modest increases in each of the last three quarters. In fact, the national demand net balance of -2% marked the weakest reading since 2012.

The breakdown shows a disparity between the sectors with demand for offices and retail space exhibiting a decline, offset by reasonable growth (net balance of +18%) in demand for industrial property. However, the pace of growth for industrial space has moderated, compared to the previous three quarters.

Rent expectations are mixed

Near term rent expectations display a similarly mixed picture. While the outlook for industrial space remains firm with 29% more respondents expecting to see a rise in rents, a slightly softer trend is expected for offices and the retail sector.

Some respondents continue attribute the drop in demand for retail space to the rise in online shopping over recent years. Significantly, the amount of available retail space rose for a second straight quarter.

The shift towards online shopping

A greater shift towards online shopping is supporting the demand in the industrial segment, with respondents noting a squeeze in the supply for leasable space in this area – a prevalent trend since 2012.

Political uncertainty

Anecdotally, political uncertainty is cited as a factor weighing on occupier and investor decisions, with hesitancy now extending to some areas beyond London. Respondents cited Brexit negotiations and the General Election resulting in a hung parliament as clouding the outlook for commercial real estate.

Looking ahead, the less buoyant trend in tenant demand has yet to meaningfully impact on longer term rental projections where prime assets look likely to continue to deliver stronger rental performance.

Investment and capital values

Looking at the investment market, 10% more respondents cite a rise in investment enquiries during Q2 (rather than a decline). Mirroring the picture in the occupier market, enquiries in the office and retail sectors were little changed on the previous quarter, but continue to rise in the industrial area of the market.

In terms of capital values, projections turned marginally negative in the retail sector and are now flat in the office sector. In each instance, these were the weakest since the immediate aftermath of the referendum.

Conversely, expectations in the industrial sector remain positive. Capital value projections for London remain more cautious, with contributors expecting no change in all-property values over the coming twelve months. London also exhibited the largest share of respondents sensing the property cycle to be in the early stages of downturn (+65%, up from +52% previously).