No respite for retail sector in UK commercial property market
Rents and capital values are, on balance, expected to rise modestly across UK commercial property over the year ahead, according to the Q4 2019 RICS UK Commercial Property Market Survey. However, while anecdotal evidence suggests greater clarity over Brexit will spur on activity previously placed on hold, this is unlikely to change the fortunes of the retail market as the downturn in that sector continues.
The latest results show that the retail sector continues to struggle against a number of factors. Looking at occupier demand, a net balance of -58% of respondents saw a fall rather than a rise in demand for retail space. Conversely, in the industrial sector, demand grew (net balance +17% up from +9%) whilst demand for office space was steady.
Looking at availability of leasable space, this was virtually unchanged in the office sector, while a dip in available industrial space was reported in Q4 (-9% down from -3%). On the other end of the scale and underlining the issues, available retail space is still rising in keeping with a pattern first established in early 2017. This has prompted a further rise in incentive packages, with 54% of respondents reporting a rise in inducements on offer to prospective tenants (up from 49% in Q3). Incentive packages are also rising in the office sector even though availability remains unchanged.
Subsequently, rental expectations for the near term and next twelve months remain negative for the retail sector, with a balance of -55% of respondents expecting a fall. Office rents are anticipated to rise according to a balance of +11% of the participants in the near term, up from -2% recorded in Q3. In the industrial sector, rents are expected to rise further too, with a net balance of +31% expecting a near-term increase (up from 19% in Q3).
Right across the UK, rent expectations (next quarter) grew in the prime office and industrial markets, with secondary office rents in London moving into positive territory for the first time since 2016. Anecdotally, greater certainty over Brexit is creating more confidence in the market in terms of stronger future pricing and pent up demand being unleashed.
When it comes to investment, retail enquiries fell further again with a balance of -49% reporting a fall in Q4. Industrial investment enquiries saw another uptick (+18% compared to +10% net balance last quarter), whilst enquiries for offices stayed largely the same at a -6% net balance. Even so, overseas investment enquiries remained generally flat for office and industrial properties, while a sharp fall continues to be reported across the retail sector.
Capital value expectations point to growth in both the office and industrial sectors, with office expectations reaching their highest reading since early 2018 (+10% net balance). Retail on the other hand sees a balance of -57% of respondents expecting a fall in capital values for the second quarter running. This is the lowest reading since Q1 2009, suggesting no respite for retailers any time soon.
In Q3 2019, a majority of 62% of UK respondents perceived the market to be in a downturn. In Q4, this reading eased to 44%. There has also been an uptake in respondents classifying the market as being in a stage of upturn, the 29% net balance is a significant increase from the 17% taking this view in Q3.
Tarrant Parsons, RICS economist, commented: “Expectations appear to have strengthened in the office and industrial sectors following the decisive outcome of the general election, with markets in prime locations in particular seeing projections for capital value and rental growth revised higher. That said, this improved sentiment has not found its way into the retail sector, where the outlook remains just as downbeat as before. Given the continued rise in retail vacancies and sharply falling demand, any change in fortunes across the sector still seems to be some way off. In the meantime, further downward adjustments in rents and capital values expected both in the year to come and further ahead.