Outlook for UK Commercial Property Hit by Economic Uncertainty

Falling occupier demand and increasing availability drove down commercial property rental expectations in 4Q11, according to the RICS UK Commercial Market Survey (11 January 2012).

Overall tenant demand continued to fall in the final three months of the year, with 13% more surveyors reporting decreases rather than increases in interest from prospective tenants. Notably, demand for commercial space in the capital also began to waiver for the first time in over a year, as London office space saw a notable downturn to a net balance of -19% (from +5%).

With demand falling back, in turn, overall availability continued to increase with a net balance of +16% of chartered surveyors reporting increases in vacant floor space. Retail and office space saw the most significant increases with net balances of +25% and +24% of surveyors reporting increases, while industrial space broadly stabilised (net balance +3).

Falling demand and rising availability continued to impact on overall rental expectations which weakened over the quarter, moving further into negative territory (-29%). The more adverse trend was visible in all parts of the UK with the headline rent expectations net balance even in London recording a negative result. However, the report suggests that rents are still projected to nudge up in the capital’s prime office sector.

Perhaps unsurprisingly, inducements continued to increase in the three months to December as landlords attempted to attract potential tenants. A quarter more respondents reported rises rather than falls in incentive packages, the highest reading since 4Q09. Surveyors report that in this difficult market, many would-be occupiers are requesting reductions in rent and higher inducements.

Against a backdrop of increasing economic uncertainty and continued constraints on bank funding investors appear to have become a little more cautious with a drop in enquiries in the final part of last year likely to translate to a lower level of activity in the early part of 2012. Capital value expectations have also eased with a more negative view of the prospects being taken in all three sectors.

Simon Rubinsohn, RICS chief economist, said: “Rental expectations have predictably become a little more negative in the face of the recent run of grim economic news. While this seems to be the case across almost all of the UK the one area that continues to buck the trend is prime London offices. However even here our indicators suggest that demand for space is a little less strong than it was. Meanwhile, the on-going shortage of mortgage finance is set to dampen investment activity. Confidence is key to a sustained recovery in the sector and this is going to be hard to bolster until the key issues surrounding the European sovereign debt crisis are resolved.”


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