Retail continues negative trend in commercial property market

As Brexit looms, respondents across the UK are still seeing evidence of firms looking to relocate at least some part of their business as a result.

In Q2, 32 per cent stated they had seen evidence of this which, although unchanged from Q1, is up from 23 per cent six months ago. Going forward, 52 per cent of respondents nationally do expect relocations, depending on how the Brexit process unfolds.

Occupier demand in Scotland remained in negative territory for the fifth quarter in succession.

However, retail is responsible for pulling the all sector figure down below zero, with a net balance reading of -53 per cent respondents reporting a decline in occupier demand. Figures remained steady in the office and industrial sectors, with 18 per cent and 27 per cent of respondents reporting an increase in demand throughout the last quarter.

Given this, the availability of vacant industrial space fell back once more during Q2, and availability of office remained flat up. Unsurprisingly, the retail sector posted the most significant rise in availability, with a net balance of 41 per cent of survey participants reporting an increase. As a result, both retail and office landlords raised the value of incentive packages on offer to tenants, with the increase most pronounced for the former.

At the headline level, near term rental expectations were broadly unchanged compared with Q1 continuing to suggest all-sector rents will dip marginally over the coming months. That said, all of the negativity is stemming from the retail sector, while the outlook appears relatively flat for office rents. The industrial sector is expected to deliver further solid rental growth over the near term.

Regarding the next twelve months across the UK, prime industrial rents are predicted to rise by roughly 3 per cent, with expectations for secondary standing around 1.5 per cent. For prime offices, approximately 2 per cent rental growth is expected, while the outlook remains flat to marginally negative for secondary office rents. On the same basis, prime and secondary retail rents are seen falling by around 3.5 per cent and 7 per cent respectively.

In terms of investor demand across Scotland, the headline net balance came in at -6 per cent, slightly less negative than in Q1 (-19 per cent). Scotland also saw the only positive reading for foreign investment enquiries in Q2, with a net balance of 2 per cent more respondents reporting an increase.

Over the next twelve months throughout the UK, further solid growth in capital values is expected across the prime industrial and office sectors. Secondary industrial assets are also anticipated to see price gains, although the outlook is flat for secondary office values. Retail capital value projections remain deeply negative.

Looking across the market, 53 per cent of respondents nationally feel the market is in some stage of a downturn (with this proportion virtually unchanged over the past three quarters). The percentage of contributors taking this view is slightly higher in London, at 63 per cent. Nevertheless, over 50 per cent of respondents also feel the market is turning down in the East Midlands, East Anglia, Scotland, the South East and the South West.

Tarrant Parsons, RICS economist, said: “The overall picture remains little changed across the UK Commercial Property Market in Q2, with the disparity between a strong backdrop for the industrial sector and weakness in retail still very evident. While expectations continue to point to solid rental and capital value growth in the former, further declines are expected in the latter. Brexit uncertainty also remains a notable headwind, causing caution across both occupiers and investors while they await clarity on the UK’s future trading relationship with the EU.”