Scotland and London lag in commercial property market recovery

The RICS data showed occupier demand edged up throughout the UK as a whole in Q3 with 12 per cent more respondents reporting a rise in demand at an all sector level (compared with a reading of 0 per cent in Q2). This modest improvement is mostly driven by the industrial sector, with 27 per cent more respondents reporting a rise in demand for industrial property across the UK. The demand for office space meanwhile, remains flat.

The increase in sentiment regarding occupier demand is replicated across most regions, with the exception of London and Scotland. Scotland has seen the sharpest drop in headline demand across the UK with 24 per cent more chartered surveyors seeing a fall during Q3. In the capital, demand fell for the second consecutive quarter with offices seeing the most significant dip (22 per cent more respondents reported seeing a fall in demand for London office space).

Anecdotal evidence suggests that political uncertainty is still having an effect on both these markets. As such, inducements are a little more visible than they have been of late in an effort to tempt occupiers to take up space in some parts of both locations – especially so in the office sector.

As market sentiment gradually normalises following the EU vote, rent expectations nationally recovered to a net balance of +13 per cent in Q3 following a reading of -7 per cent in Q2. Most of the improvement is driven by the industrial sector, with 23 per cent more respondents expecting an increase. Central London and Scotland were again the only two areas in which near term rent expectations did not move into positive territory.

Niall Burns of Burns & Shaw, Edinburgh, said: “The threat of a second referendum is having a more detrimental effect on commercial property in Scotland than Brexit.”

Investment enquiries have also seen a gentle increase in Q3 after a steep fall in Q2. Across all sectors, 9 per cent more respondents saw a rise in investment demand. Foreign investment appetite in Scotland remained in negative territory for a second quarter, with 36 per cent more respondents reporting a decline in foreign investment enquiries.

As sentiment turned positive in comparison to Q2, capital value expectations also recovered noticeably. For the next twelve months, a net balance of 24 per cent more respondents expect capital values to increase, with prime industrial and office markets expected to see the strongest gains. Again, London and Scotland are seeing a weaker picture and a more or less flat trend is expected over the coming twelve months.

In an additional question designed to capture the impact on business of the EU referendum, some 86 per cent of respondents nationally suggested that they have not seen any evidence at this point of companies looking to relocate some part of their activity away from the UK. However the figures differed greatly by region - Northern Ireland (36 per cent), the West Midlands (27 per cent) and Central London (26 per cent) returned the highest proportion of respondents who claim they have seen some evidence of this trend.

Both UK and Global contributors were also asked if they expected to see an increase in business moving away from Britain over the next two years. On a UK-wide basis, two thirds of respondents answered ‘No’.

However, again, Northern Ireland (71 per cent) displayed the highest share of respondents who felt firms were likely to move and in Central London, 47 per cent expect some businesses to relocate over the coming two years. In comparison, when the question was asked to our global respondents for the RICS Global Commercial Market Monitor, over 30 per cent of respondents in Poland, Germany and Ireland claim they have already received enquiries from companies looking to relocate part of their business away from Britain. A smaller, but not insignificant, share of contributors in Spain, the Netherlands and France also reported having seen such enquiries since the vote in June.

Simon Rubinsohn, RICS chief economist, said: “The negative mood in the Q2 survey reflected the fact that it was conducted in the immediate aftermath of the referendum. The latest results suggest that the commercial market has subsequently settled down which is broadly consistent with much of the other macro news flow that has emerged over the past few months. In particular the rebound in our occupier demand indicator suggests that for at least the time being, the UK economy is proving relatively resilient.

“Interestingly, the feedback we have received was noticeably more cautious in Scotland and parts of London but despite this, the RICS results do suggest that the drop in the pound is encouraging foreign investors to show interest in the market particularly in the capital.”