Brexit continues to dampen UK commercial property market

Brexit continues to affect the UK commercial property marketThe Brexit impasse 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 suggest that 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 percent up from +53 percent in Q2), with anecdotal evidence suggesting that Brexit is having an increasingly detrimental impact on market activity.

In the occupier market, tenant demand reportedly fell at the headline level once again, with the net balance slipping to -19 percent, from -13 percent previously. Once again, the retail sector continues to drive the overall decline (net balance -60 percent compared to -59 percent in Q2). However, demand for office space also fell during Q3, (net balance of -9 percent compared to -4 percent 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 percent (down from +20 percent 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.

 

The downward pressure on rent

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 percent 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 percent 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.

[perfectpullquote align=”right” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]With the picture unlikely to become clear until into the New Year it may well mean hesitation continues over the near term[/perfectpullquote]

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.

“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”, claims Tarrant Parsons, an Economist at RICS. “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.”

Interest in investing in the UK’s commercial property market fell at a faster pace this quarter, with -15 percent more respondents seeing a fall in investment enquiries. Overseas investment demand also declined across all three sectors with the net balance of -18 percent, the poorest reading since Q2 2016.

Capital value expectations for the coming twelve months point to growth slowing across the industrial sector, but remaining solid for prime assets nonetheless. Prime office values will rise modestly, with a slight dip in prices for secondary offices. For the retail sector, the negative trends of recent quarters show no signs of easing and projections continue to signal a sharp decline in both prime and secondary retail values over the course of the next twelve months, with a similar pattern at the three-year horizon.