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Investment Demand Continues to Recover

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Investment Demand Continues to Recover Economics Q4 2016: UK Commercial Property Market Survey Investment demand continues to recover • Investment enquiries rise across all sectors • Occupier demand flat for offices and retail, but the industrial sector continues to outperform • Expectations for rental and capital value growth slip back into negative territory in central London The Q4 2016 RICS UK Commercial Property Market Survey Contributors were also asked whether or not they expect to results show investment demand continuing to pick-up see businesses moving from the UK over the next two years. following the volatility reported around the time of the EU At the national level, 39% thought it was likely that relocation referendum. Trends on the occupier side of the market are would occur (up slightly from 33% back in Q3) while the somewhat flatter, with only the industrial sector seeing a rise majority continued to think otherwise. However, over 50% of in tenant demand during Q4. Meanwhile, sentiment remains respondents in Central London, Northern Ireland and Scotland more subdued across London, with respondents (at an do believe firms will choose to move at least some part of their aggregate level) expecting rents and capital values to weaken business activity away from Britain as a result of Brexit. a little further in the near term. Focussing on the investment market, demand continued to Starting with the occupier market, demand from tenants recover for a second straight quarter with growth in enquiries increased modestly at the all-sector level for the second gaining momentum during Q4. Furthermore, all sectors were consecutive quarter. However, according to the feedback, reported to have seen a pick-up in demand, albeit the rise this was once again driven entirely by the industrial segment was only modest in the retail sector. Crucially, despite some while demand was flat in both the office and retail areas of of the concern surrounding potential relocation, demand from the market. With demand failing to rise in these two sectors, overseas buyers was up notably across all areas of the market, landlords were prompted to increase the value of incentive although the weaker exchange rate was likely an important packages on offer to prospective tenants. In the office sector, factor. At the same time, the supply of property for investment inducements have now risen in each of the last two quarters at purposes fell in both the office and industrial sectors, but was the headline level (the first time this has happened since 2013). broadly unchanged in the retail segment. Meanwhile, lack of supply continues to be a key feature of the Near term capital value expectations remain mildly positive industrial sector, with a net balance of 32% of respondents at the all-sector level, with 14% more respondents projecting reporting a further decline in leasable space during Q4. values to rise (rather than fall) over the coming quarter. Consequently, industrial supply, in net balance terms, has Over the next twelve months, respondents anticipate capital now fallen in eighteen successive quarters. Alongside this, values will increase across the majority of sub-sectors, led availability was unchanged in the office and retail sectors by growth in the prime industrial market. At the other end of at the national level. Near term rent expectations are now the spectrum, secondary retail assets are expected to see no pointing to strong growth in the industrial sector but very change in values over the coming twelve months. marginal gains across office space. Conversely, respondents are now envisaging modest declines in retail sector rents. Investment trends in London remain mixed. Industrial assets attracted a solid rise in investor interest during Q4 The regional breakdown shows London as the only area where while overall enquiries were flat in the office sector and occupier demand fell during Q4, thereby extending a run of declined modestly in the retail segment. That said, foreign negative readings in the capital into a third consecutive report. investment demand did in fact grow strongly across each What’s more, the drop in demand is expected to translate sector of the capital, with the sharp decline in sterling since into slightly lower rents in the office and retail sectors over June particularly prominent in enticing overseas demand. the coming twelve months. Even so, outright declines are Nevertheless, having stabilised during Q3, all-sector capital anticipated to be largely concentrated in secondary markets, value expectations slipped back into negative territory in with the outlook for prime locations more or less flat. London. Within this, secondary office and retail markets are projected to see the most significant declines while prime Members were again asked if they had seen any evidence counterparts are anticipated to prove more resilient. of firms looking to relocate away from the UK in response Britain’s decision to leave the EU. Nationally, only 18% of Across London as a whole, 62% of respondents are of the respondents reported seeing evidence of this (up slightly from opinion that the market is in the early to middle stages of a 14% in Q3). Therefore, a strong majority (82%) were unaware downturn (up from 44% in Q3). Although opinions remain of any businesses looking to shift part of their operations away varied, the feedback across the rest of the UK is much more from the UK. When disaggregated, Central London (32%), upbeat as a whole. When London is excluded, the majority of Northern Ireland (31%) and Scotland (29%) had the largest respondents (62%) feel the market is in the upturn phase of the proportion of contributors claiming to have seen firms looking cycle. Meanwhile, only 20% feel conditions in their local market to relocate. are consistent with a downturn. To receive a free copy of this report on the day of release e: [email protected] rics.org/economics Q4 2016: UK Commercial Property Market Survey rics.org/economics Commercial property - all sectors Occupier Demand Availability Net balance % Net balance % 60 80 40 60 20 40 0 20 -20 0 -40 -20 -60 -40 -80 -60 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Rent Expectations Inducements Net balance % Net balance % 60 100 40 80 20 60 0 40 -20 20 -40 0 -60 -20 -80 -40 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Investment Enquiries Capital Value Expectations Net balance % Net balance % 60 60 40 40 20 20 0 0 -20 -20 -40 -40 -60 -60 -80 -80 -100 -100 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 2 © RICS Economics 2017 Q4 2016 Q4 2016: UK Commercial Property Market Survey rics.org/economics Commercial property - Sector Breakdown Occupier Demand Availability 80 Net balance % 80 Net balance % 60 Office 60 Industrial Office Retail 40 Industrial Retail 40 20 0 20 -20 0 -40 -20 -60 -40 -80 -100 -60 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1999 2001 2003 2005 2007 2009 2011 2013 2015 Rent Expectations Inducements 80 Net balance % 100 Net balance % Office 60 80 Industrial Office Retail 40 Industrial 60 Retail 20 40 0 20 -20 0 -40 -20 -60 -80 -40 -100 -60 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Investment Enquiries Capital Value Expectations 80 Net balance % 80 Net balance % 60 60 Office Industrial 40 40 Retail 20 20 0 0 -20 -20 -40 -40 Office -60 Industrial -60 Retail -80 -80 -100 -100 -120 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 3 © RICS Economics 2017 Q4 2016 Q4 2016: UK Commercial Property Market Survey rics.org/economics Commercial property - Additional Charts 12 Month Capital Value Expectations 12 Month Rent Expectations 60 Net balance % 60 Net balance % 45 Q3 2016 45 Q4 2016 Q3 2016 Q4 2016 30 30 15 0 15 -15 0 -30 Prime Office Secondary Prime Secondary Prime Retail Secondary Average Prime Office Secondary Prime Secondary Prime Retail Secondary Average Office Industrial Industrial Retail Office Industrial Industrial Retail Market Valuations Property Cycle 80 % of Respondents % of Respondents 70 Peak 6.8% 60 Early Downturn 18.6% 50 Q3 2016 Mid-Upturn 23.4% Q4 2016 40 Mid-Downturn 9.5% 30 Bottom of the Cycle 16.0% 20 10 Early Upturn 31.5% 0 Very Cheap Cheap Fair Value Expensive Very Expensive Extra Question 1 Extra Question 2 Have you seen any evidence of firms looking to relocate away from the UK in Do you expect to see firms relocating away from the UK over the next 2 years? response to the Brexit vote? 90 70 % % 80 60 70 50 60 50 40 40 30 30 20 20 10 10 0 0 Yes No Yes No 4 © RICS Economics 2017 Q4 2016 Q4 2016: UK Commercial Property Market Survey rics.org/economics Chartered Surveyor market comments East Midlands Cameron Park, Barker Storey Mark Bielby, Miller Birch, Andrew Bastin, Bastin Matthews, Peterborough, cp@ Nottingham, mark.bielby@ Commercial, Norwich, andrew@ Ben Coleman BSc FRICS, bsm.uk.com - There is a distinct miller-birch.co.uk - Nobody bastincommercial.co.uk - The Ben Coleman Associates, lack of small industrial stock in can envisage how the Brexit Norwich markets remain fairly Northampton, ben@ the Peterborough area and we negotiations will affect the slow on the occupier side, bencolemandassociates.co.uk therefore anticipate a high level property market. However the though they are not as prone - Cheap funds have stimulated of speculative development market always responds badly to dramatic supply/demand the demand for freeholds.
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