Brexit uncertainty is contributing to perceptions that the UK Commercial Property Market is in the downturn phase of the property cycle, according to the Q3 2019 RICS UK Commercial Property Market Survey.
The latest results show the highest proportion of respondents sensing the overall market is in the downturn phase of the property cycle since the series began in 2015 (+62% up from +53% in Q2), with anecdotal evidence suggesting that Brexit is having an increasingly detrimental impact on market activity.
READ ALSO : Commercial mortgage brokers optimistic about post-Brexit outlook
In the occupier market, tenant demand reportedly fell at the headline level once again, with the net balance slipping to -19%, from -13% previously.
Once again, the retail sector continues to drive the overall decline (net balance -60% compared to -59% in Q2). However, demand for office space also fell during Q3, (net balance of -9% compared to -4% in Q2).
Demand for industrial space continued to rise, and was the only sector to see any growth, although the increase was marginal, as the net balance came in at +9% (down from +20% in Q2).
Availability of leasable space was unchanged across the industrial sector in Q3, marking a slight departure from the uninterrupted run of declining supply being reported since 2013. The retail sector continues to have more vacancies coming to market, prompting another increase in incentive packages on offer to prospective tenants. Inducements are also on offer in the office sector as the availability of office space rose once again.
“Although a clear majority of respondents now perceive the market to be in a downturn, the fact that capital value expectations are still positive in many parts of the country suggests a relatively soft landing for the commercial real estate sector is anticipated overall. That said, the fallout for retail is altogether more severe. It remains to be seen what impact the latest Brexit developments have on confidence across the sector, but with the picture unlikely to become clear until into the New Year it may well mean hesitation continues over the near term,” said Tarrant Parsons, RICS Economist.
READ ALSO : UK commercial property capital values fall in September
Respondents to the survey project that rents for the coming three months are expected to rise in the industrial sector; the only sector to see any notable interest from tenants. Unsurprisingly, the retail sector isn’t expected to improve, some 56% of respondents expect to see further reductions in rents across the market, the lowest reading since the financial crisis (Q1 2009).
Looking further ahead, 28% of respondents expect prime office rents to increase for the year ahead, but the outlook has turned marginally negative for secondary office rents, driven by weakening expectations in London and a largely stagnant picture across the regions.
By way of contrast, the industrial sector continues to return solid rental growth projections for the coming twelve months in all parts of the UK. Unsurprisingly, rents are set to fall further in retail, both in prime and secondary locations.
Interest in investing in the UK’s commercial property market fell at a faster pace this quarter, with -15% more respondents seeing a fall in investment enquiries. Overseas investment demand also declined across all three sectors with the net balance of -18%, the poorest reading since Q2 2016.