Offices converted into residential drives up commercial shortages
During Q2 2014, chartered surveyors saw a rise in the number of transactions of commercial properties being sold with Permitted Development Rights (PDR) to be converted into residential properties. UK-wide, a net balance of 49% of respondents said this activity was having a moderate impact on commercial market activity, while almost one in five (net balance of 18%) said it was having a substantial impact.
The picture across the country, however, was more polarised, with respondents in the north being less affected by PDR transactions (net balance of 49% saying it was having no effect on the market, compared with 32% of respondents in the south saying it was substantial).
Further compounding shortage issues, overall availability of commercial property declined at its fastest rate since the commercial market series began in 1998 (net balance of 33% more surveyors reporting shortages), with sharp declines in office and industrial space availability and the lack of supply to the commercial market is pushing investors away from prime location investments and towards B grade investments.
In London and the South particularly, respondents reported that growing demand and the resulting drop in yields is encouraging investors to look for opportunities beyond prime locations. In London, a net balance of 50% of respondents indicated that investors were looking to add secondary or tertiary assets in their portfolios, while in the South, 62% signalled a growing appetite secondary space.
Looking ahead, expectations for rent levels over the course of 2014 revealed a net balance of 33% more surveyors expecting rent levels to increase throughout the year. Respondents forecast rents will rise by 5.5% in the industrial sector, 4.3% in the offices sector and 2.8% across retail space.
Simon Rubinsohn, RICS chief economist, commented: “The latest results provide clear evidence that the economic recovery is broadening out across the country with rising employment increasing the demand for space in all sectors of the market. As a result, the balance of power is now shifting back to landlords with rent expectations turning increasingly positive.
“Meanwhile, the pressure in the office sector is being exacerbated particularly in popular locations by the gradual conversion of some secondary space into residential. While making a much needed contribution to the substantial shortfall of homes, there are understandable concerns that this could be creating a related problem for businesses looking expand their footprint as economic confidence grows.”