Q4 2015: UK Commercial Property Market Survey

The Q4 2015 RICS UK Commercial Property Market Survey shows a continued rise in occupier and investment demand, albeit the latest results signal a slight softening in the rate of increase. Nevertheless, with supply failing to keep pace with demand right across the UK, capital values and rents remain firmly underpinned.

In the occupier market, demand for leasable space continued to rise across all sectors, as it has done in each quarter since the early part of 2013. According to survey feedback, momentum is greatest in the industrial sector at present, although tenant demand growth remains solid in both the office and retail areas of the market. At the same time, available space continues to fall significantly with the RICS supply indicator for the occupier market signalling an eleventh consecutive quarter of contraction.

Against this backdrop, the value of incentive packages on offer from landlords to tenants also fell across each sector - an ongoing theme for much of the past two years. Meanwhile, at the national level, development starts continue to edge up only modestly, with anecdotal evidence citing a lack of commercial construction activity across many locations. The London office sector is, however, an exception to this, where development has reportedly risen sharply over each of the past three quarters.

With the national picture showing a shortage of supply coming through, and demand still rising firmly, all-sector rent expectations continue to point to strong growth both in the near term and further out. That said, having eased in each of the last two reports, three month rent expectations data suggest the pace of rental growth may have reached a peak. Over the next twelve months, respondents are most confident in seeing rental increases in the prime industrial market with a net balance of +87% foreseeing a rise (as a opposed to a fall). At the other end of the scale, secondary retail space exhibits the most modest reading on a sectoral comparison, but still posted a healthy balance of +51% expecting rents to grow.

In terms of the regional breakdown, the strongest near term projections continue to be returned by respondents in London and the East of England. Nevertheless, all-sector rents are expected to rise, to a greater or lesser extent, across all areas of the UK during 2016.

Turning to the investment market, buyer enquiries continued to rise in each sector although (in net balance terms) growth moderated to the slowest pace seen since Q3 2013. Likewise, demand from overseas purchasers also slowed for a second successive report, with each of the traditional sectors seeing only a marginal rise during Q4. At the same time, the supply of property for sale decreased across the board, in keeping with the trend reported since the series was introduced in Q3 2014.

Consequently, capital values are anticipated to rise further in each area of the market over the near term and to continue to increase during the next twelve months. Within this, prime office and industrial sector values are projected to chalk up the most sizeable gains. At the regional level, price expectations sit comfortably in positive territory across all parts of the UK. Interestingly, although still firm, respondents in central London scaled back their expectations for capital value growth notably over the quarter.

In fact, 81% of contributors now sense commercial real estate in central London is overpriced to some extent (slightly up on the 77% who took this view in Q3). Indeed, having compressed sharply over the past year, contributors feel there is limited scope for yields to fall further, meaning rental growth will have to take over as the main driver of investment activity in central areas of the capital. Across the UK as a whole meanwhile, a vast majority of 85% of respondents still perceive prices to be either at or below fair value at present (unchanged relative to Q3).

In terms of current views on the property cycle, at the national level, the largest share (37%) of contributors believe their local market is in the early stages of the upturn, while 35% feel the upswing has progressed slightly further and the market has reached the middle phase of the growth cycle (29% in Q3). Only 7% sense conditions are close to peaking (more or less stable when compared to Q3). In London, the highest proportion of contributors (45%) consider their market to be in the mid-upturn phase while 23% sense conditions may be approaching the top of the cycle.