Both investor and
occupier demand edged up during Q3 for UK commercial property, but there is
still a significant difference between sectors with industrial clearly
outperforming, according to the Q3 2017 RICS UK Commercial Property Market
Survey.
In Q3, investment
demand for commercial property continued to pick up, with 20% more respondents
seeing an increase (rather than decline) in investment enquiries up from Q2
(+10%). Demand growth was strongest in the industrial sector, and weakest
across retail.
As domestic interest
increases, interest from overseas buyers also rose across all areas of the
market during Q3. Alongside this, near term capital value
expectations point to strong growth across industrial assets, a modest rise in
office prices, and little change for values across the retail sector.
"The feedback
to the Q3 survey reflects some of the broader macro issues, with the underlying
momentum in the occupier market a little firmer further away from the
capital," said Simon
Rubinsohn, RICS Chief Economist. "This is also mirrored in valuation
concerns with around two thirds of respondents viewing the London market as
being dear.
"A key issue
going forward will be how the market responds to the likely first interest rate
rise in a decade next month.
"Given that
expectations are only for a modest tightening in policy, the likelihood is that
it will be able the weather the shift in the mood music. But this remains a
potential challenge if rates go up more than is currently anticipated."
Occupier demand in
the quarter held steady at the headline level, with 5% more respondents seeing
an increase as sentiment picks up. Looking at individual sectors, demand has
increased strongly for industrial space (net balance +28%) and stabilised in the
office sector, having fallen in Q2. Meanwhile, demand continued to fall for the
second consecutive quarter in the retail sector.
On the back of
sluggish demand in the office sector, landlord incentive packages on offer to
tenants have no reportedly risen in five successive periods. Retail inducements
also picked up, marking the second quarter running in which they have done so.
By way of contrast, incentives continued to decline in the industrial sector.
Given the occupier
demand picture, it is unsurprising that near term rent expectations indicate
firm growth in the industrial sector, a broadly flat picture for office rents,
and a marginally negative one for retail at the UK level. Looking further out, over
the year ahead, rental expectations are positive for both prime and secondary
industrial space, prime offices and to a lesser extent prime retail space. The
outlook for secondary office space remains flat. Conversely, the year ahead
rental expectations for secondary retail are firmly negative, with rents still
anticipated to decline.
With regards to the
regional breakdown, all-sector rent expectations in the near term are generally
positive across most parts of the UK – with London again being the
exception. In the capital, negative expectations in office and retail
cancel out positive expectations for industrial rent.
London is in fact
displaying more cautious sentiment than virtually all other parts of the UK in
the near term including across demand and new development starts, although
availability and inducements have picked up. While investment trends appear a
little more resilient, headline capital value expectations are now more or less
flat in the capital.
In terms of
valuations, across the UK as a whole, a strong majority of contributors (65%)
sense the market is fairly valued at present (unchanged from Q2). Central
London continues to exhibit the highest proportion of respondents viewing the
market to be overpriced to some extent (67%). Meanwhile, 37% of respondents
from the South East are now of the opinion that values are stretched relative
to fundamentals, a steady increase on 16% who were taking this view three
quarters ago.
Finally, during Q3,
although views remain mixed, the largest share of contributors nationally feel
conditions are consistent with the middle stages of an upturn (30%). In Central
London, 73% of respondents sense the market to be in some stage of a downturn.
