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25 JUL 2019
The Q2 2019 RICS UK Commercial Property Market Survey results show trends of recent quarters remain in place.
The retail sector continues to decline in the face of increased online spending, with solid demand still being reported across the industrial sector.
As Brexit looms, respondents are still seeing 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 which, although unchanged from Q1, is up from 23% six months ago. Going forward, 52% of respondents nationally do expect relocations, depending on how the Brexit process unfolds.
Occupier demand remained in negative territory for the fifth quarter in succession. However, retail is responsible for pulling the all sector figure down below zero, with a net balance reading of -59%. Occupier demand for offices changed little over the quarter, as industrial demand (occupier) rose sharply.
Given this, the availability of vacant industrial space fell back once more during Q2, and 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.
Brexit uncertainty also remains a notable headwind, causing caution across both occupiers and investors while they await clarity on the UK’s future trading relationship with the EU.
At the headline level, near term rental expectations were broadly unchanged compared with Q1 continuing to suggest all-sector rents will dip marginally over the coming months. That said, all of the negativity is stemming from the retail sector, while the outlook appears relatively flat for office rents. The industrial sector is expected to deliver further solid rental growth over the near term.
Regarding the next twelve months, prime industrial rents are predicted to rise by roughly 3%, with expectations for secondary 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.
In terms of investor demand, the headline net balance came in at -9%, slightly less negative than in Q1 (-15%). For the third quarter in a row, demand from overseas investors fell across all areas of the market.
Over the next twelve months, further solid growth in capital values is expected across the prime industrial and office sectors. Secondary industrial assets are also anticipated to see price gains, although the outlook is flat for secondary office values. Retail capital value projections remain deeply negative.
Looking across the market, 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 percentage 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.
Tarrant Parsons, RICS Economist, comments: "The overall picture remains little changed across the UK Commercial Property Market in Q2, with the disparity between a strong backdrop for the industrial sector and weakness in retail still very evident. While expectations continue to point to solid rental and capital value growth in the former, further declines are expected in the latter.
"Brexit uncertainty also remains a notable headwind, causing caution across both occupiers and investors while they await clarity on the UK's future trading relationship with the EU."