RICS Q4 2019: UK Commercial Property Market Survey

The RICS® Q4 2019 UK Commercial Property Market Survey indicates that rental and capital value growth expected to strengthen modestly outside of the retail sector. The prime office and industrial capital value and rental projections have been upgraded. Also, to note, occupier and investor demand continues to rise, albeit relatively modestly, across the industrial sector. However, retail downturn shows no sign of easing.

The results from the Q4 survey has a modestly stronger outlook emerging for rents and capital values over the next 12 months. The greater political clarity, the expected to spur some pent-up activity which had been placed on hold due to Brexit uncertainty. Unfortunately, is not likely to change the fortunes of the retail sector which continues to struggle. In fact, the latest survey shows not easing of the ongoing downturn across the retail portion of the commercial property market.

The industrial segment of commercial property experienced an increase in tenant demand, while respondents cited a flat trend in demand for office space. Availability was reported as unchanged in the office sector and a further modest dip in the supply of industrial space. In contrast to the latter, retail vacancies are still cited to be rising sharply, in keeping with pattern established since early 2017.

In terms of rental growth for retail, the expectations remain negative for retail for the next 12 months. The survey states, “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).”

In terms of rental growth for prime office space, the respondents anticipate rents to rise by roughly 2.5% in the next 12 months. The survey goes on to say, “the outlook is flat for secondary office rents, although this marks an improvement on the slightly negative projections put forward by respondents last time.”

For the industrial sector, rental growth is expected to rise by approximately 4% in prime locations, while respondents believe that the secondary industrial market will rise nearly 2%.

In terms of multifamily residential accommodation, the survey states, “respondents expect rents for prime multifamily residential accommodation to increase by a little over 3% in the coming twelve months”.

In regard to investment in the commercial property sector, the survey results suggest: “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.”

Important to note from the survey:

Capital value expectations were adjusted higher for both prime and secondary industrial assets for the coming twelve months.
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.
The office and industrial sectors (particularly prime) are expected to deliver price gains right across the UK.
Sentiment remains downbeat on the prospects for retail capital values in each region.

In summary, given the mixed sectoral data, the views of the respondents are highly varied when it comes to the current perceptions on the property cycle. The survey states, “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.”

Charts below sourced from the RICS Q4 2019 Survey.