26 January 2018
RICS UK Commercial Property Market Survey Q4 2017
Industrial property is the clear outperformer in the UK Commercial market as retail continues to lag significantly, according to the Q4 2017 RICS UK Commercial Property Market Survey.
- Retail sector continues to weaken as occupier and investor interest drops
- Industrial property remains standout performer in both occupier and investment markets
- London market values increasingly viewed as expensive
- Demand for more industrial and office space
In the UK retail sector in Q4 2017, occupier demand fell for the third consecutive quarter with 22% more respondents reporting a fall in demand from prospective tenants. This is the lowest reading since 2011 and alongside this, the retail sector was the only area of the market to see an increase in the availability of leasable space.
Against this backdrop, rentals are also expected to decline for retail space in the near term, and this picture is predicted to continue over the next 12 months. That said, although rent projections for prime retail space were downgraded from a slightly positive outlook to flat in Q4, the weakness in retail rental values is mostly in secondary retail locations which have slipped further into negative territory.
On a UK-wide basis, headline occupier demand for UK commercial property was flat in Q4, but rising industrial demand is balancing out the flat office demand and the decline in retail. 24% more respondents have seen an increase in occupier demand for industrial space in Q4. As industrial continues to outperform expectations, the near-term rental growth in that sector remains very positive with 33% more respondents expecting a rise in rents. Respondents anticipate little change in office sector rents.
Although the office sector has remained relatively flat over recent quarters, the value of landlord incentive packages has now risen in six straight reports. The pace of increase of these incentives to take office space during Q4 (in net balance terms) was the steepest since 2010.
Looking further ahead for industrial and office space, over the next 12 months both prime and secondary industrial rents are predicted to rise sharply, while prime office rents are expected to see modest gains and the outlook for secondary offices remains flat.
When broken down by region, all-sector rental growth is predicted to be positive across most areas - albeit to a lesser extent than previous predictions. As in previous quarters, London remains the exception, where respondents foresee declining rents in the office and retail sectors. Nevertheless, this is largely concentrated across secondary space, while rents across prime markets should prove more resilient over the year ahead.
Moving to the investment side of the market, 21% more respondents cited an increase in enquiries from investors in Q4, which is the sixth successive quarterly rise. Looking at sectors, investors were most interested in industrial and office unsurprisingly, with demand picking up in both, while enquiries were unchanged across retail. Interest from overseas buyers also continued to rise modestly but with growth evenly matched across each market sector. In the face of increased interest, the supply of investable office and industrial units continued to decline in Q4, but respondents noted a stable trend in the retail sector.
In relation, near term capital value gains are expected to be most significant in the industrial sector with 38% of respondents anticipating a rise, but they also strengthened slightly in the office sector relative to Q3. At the other end of the scale, retail capital values are now projected to decline in the near term. At the 12 month horizon, industrial assets once again exhibit the firmest outlook, both prime and secondary, compared to all other categories. Projections are comfortably positive in both prime and secondary office sub markets with secondary retail the only sub-market in which respondents anticipate a fall in values over the year ahead in its entirety.
Moving to perceptions of market value, the majority of contributors (70%) feel the market offers fair value, although 18% feel prices are now stretched relative to fundamentals (up from 10% on the same basis at the start of the year). Across London as a whole, the proportion of respondents viewing the market as overpriced increased to 63% in Q4. In fact, having dropped to 42% at the end of 2016, this proportion has been steadily on the rise throughout the course of 2017.
Comments (1) - The view from RICS
Simon Rubinsohn, RICS Chief Economist 24 January at 15:05PM
The weakish tone to the Q4 survey results for the retail sector sits comfortably alongside the generally disappointing trading statements emanating from the high street in the run-up to Christmas. The counterpart to this is the ongoing strength in demand for well-located warehouses to support the inexorable rise of the online consumer.
Meanwhile in the office sector, the resilience of the headline rent indicator is masking the increasing attractive inducement packages required to encourage take up of space. Valuations particularly in the capital’s office market continue to look stretched but overseas investors remain ready buyers for now even as domestic money seeks out opportunities elsewhere around the country.