Retail Pressure Shows No Signs of Abating

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Retail Pressure Shows No Signs of Abating Economics Q2 2019: UK Commercial Property Market Survey Retail pressure shows no signs of abating • Rents and capital values expected to fall further across prime and secondary retail markets • Demand continues to outstrip supply in the industrial sector • Slim majority of respondents feel the market is in a downturn The Q2 2019 RICS UK Commercial Property Market Survey regional outlook remains very similar to that at the national results show the well established trends of recent quarters level, with both prime and industrial sector rents expected to remain firmly in place. Indeed, the retail sector continues to rise right across the UK. At the other end of the spectrum, display firmly negative sentiment in the face of the structural rental expectations for the retail sector (both prime and shift towards increased online spending. Meanwhile, solid secondary) remain comfortably negative within all areas. demand growth is still being reported across the industrial sector, with this pattern evident across all parts of the UK. In each quarter since the Brexit vote took place, survey participants have been asked if they have seen any evidence In terms of the occupier market, the tenant demand indicator of firms looking to relocate at least some part of their business remained in negative territory for a fifth quarter in succession as a result. In Q2, 32% stated they had seen evidence of at the headline level. Even so, the net balance reading of this, unchanged from Q1, but up from 23% six months ago. -59% in the retail sector was again responsible for pulling the Going forward, a slim majority (52%) of respondents nationally all-sector average below zero. In the office sector, respondents do expect relocations to occur although this will very much cited little change in occupier demand over the quarter, while depend on how the Brexit process unfolds from this point. tenant enquiries for industrial space continue to rise smartly. In terms of investor demand, the headline net balance came Given this, the availability of vacant industrial space fell back in at -9%, slightly less negative than in Q1 (-15%). Beneath once more during Q2, although the pace of decline has slowed this figure, growth in the industrial sector was offset by a fall in over the past year. At the same time, the availability of office demand for retail units, while the trend was flat for offices. space edged up for a third successive report. Unsurprisingly, the retail sector posted the most significant rise in availability, For the third quarter in a row, demand from overseas investors with a net balance of +52% of survey participants reporting fell, to a greater or lesser degree, across all areas of the an increase (the most elevated figure since Q2 2009). As market. Alongside this, the supply of property available on the a result, both retail and office landlords raised the value of sales market held steady at the headline level, although an incentive packages on offer to tenants, with the increase most increase was reported across the retail sector. pronounced for the former. Over the next twelve months, respondents foresee further At the headline level, near term rental expectations were solid growth in capital values across the prime industrial and broadly unchanged compared with Q1 (net balance -7% office sectors. Secondary industrial assets are also anticipated compared with -9% previously). As such, this measure to chalk up further, albeit modest, gains although the outlook continues to suggest all-sector rents will dip marginally over is broadly flat for secondary offices. In contrast, retail capital the coming months. That said, all of the negativity is stemming value projections remain entrenched in negative territory. from the retail sector, which posted a net balance of -53%, From a regional perspective, the East Midlands, along with while the outlook appears relatively flat for office rents (net Scotland and Northern Ireland returned the most elevated balance +2%). Meanwhile, contributors envisage the industrial expectations for capital value growth in the prime office sector. sector delivering further solid near term rental growth. At the same time, the East Midlands, Scotland and the West Regarding the next twelve months, respondents continue Midlands display the firmest assessment on the outlook for to foresee prime industrial rents rising by roughly 3%, with prime industrial values for the coming year. Conversely, retail expectations for secondary slightly more modest, standing capital values are anticipated to decline at the sharpest pace in around 1.5%. For prime offices, approximately 2% rental the North East and Greater London in the next twelve months. growth is expected, while the outlook remains flat to marginally Meanwhile, 53% of respondents nationally feel the market negative for secondary office rents. On the same basis, prime is in some stage of a downturn (with this proportion virtually and secondary retail rents are seen falling by around 3.5% and unchanged over the past three quarters). The share of 7% respectively. contributors taking this view is slightly higher in London, at When disaggregated, the results show a similar contrast 63%. Nevertheless, over 50% of respondents also feel the between the prime and secondary office sectors in London. market is turning down in the East Midlands, East Anglia, Whereas prime office rents are seen increasing by 1.5% Scotland, the South East and the South West. Nevertheless, across the capital over the next twelve months, rents for the overall outlook for the market is still consistent with a ‘soft secondary office space are seen falling by 1%. Elsewhere, the landing’ at this stage. To receive a free copy of this report on the day of release e: [email protected] rics.org/economics Q2 2019: 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 2018 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 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 2018 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 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 2008 2010 2012 2014 2016 2018 2008 2010 2012 2014 2016 2018 2 © RICS Economics 2019 Q2 2019 Q2 2019: 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 2018 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Rent Expectations Inducements Rent Expectations by Sector 100 Net balance % 80 Net balance % Office 80 Industrial 60 Office Retail Industrial 60 40 Retail 20 40 0 20 -20 0 -40 -20 -60 -40 -80 -100 -60 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 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 2008 2010 2012 2014 2016 2018 2008 2010 2012 2014 2016 2018 3 © RICS Economics 2019 Q2 2019 Q2 2019: UK Commercial Property Market Survey rics.org/economics Commercial property - Additional Charts 12 Month Capital Value Expectations 12 Month Rent Expectations 60 Net balance % 80 Net balance % 45 65 Q1 2019 50 30 Q2 2019 Q1 2019 35 Q2 2019 15 20 0 5 -15 -10 -30 -25 -45 -40 -60 -55 -75 -70 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 70 % of Respondents % of Respondents 60 Peak, 12% 50 Q1 2019 40 Early Downturn, 31% Q2 2019 Mid-Upturn, 13% 30 20 Early Upturn, 12% 10 0 Bottom, 10% Very Cheap Cheap Fair Value Expensive Very Expensive Mid-Downturn, 22% 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? 80 % 60 % 70 50 60 40 50 40 30 30 20 20 10 10 0 0 Yes No Yes No 4 © RICS Economics 2019 Q2 2019 Q2 2019: UK Commercial Property Market Survey rics.org/economics Chartered Surveyor market comments East Midlands Brendan Bruder BSc MRICS, John Chappell, Skegness, Richard Sutton MRICS, Northampton, Abbey Ross Chappell & Co Surveyors Ltd, Nottingham, NG Chartered Ben Coleman BSc Chartered Surveyors, brendan. john@chappellandcosurveyors. Surveyors, richards@ng-cs. FRICS, Northampton, Ben [email protected] - The logistics co.uk - We believe that the com - Occupier and investor Coleman Associates, ben@ property sector is still the main commercial property market interest in the two main asset bencolemanassociates.co.uk driver for development in the will continue to be blighted categories being office and - Whilst there are concerns Northampton area. Gazeley are by political and economic industrial remains very positive. over Brexit and the ongoing on site for a 3 unit speculative uncertainty caused by Brexit. No comment on retail. Credit uncertainty in the market, development at GPark (Moulton Our politicians have always conditions in our region seem to demand is holding up well - a Park) and Pannatoni are building demonstrated an incredible be changing with certain banks’ shortage of quality stock is a out 1.6m sq ft at their eponymous ability to ignore the advice of appetite to lend on commercial major factor in the local/regional scheme adjacent to the M1, bodies such as the RICS but projects now diminishing.
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