RICS: Brexit uncertainty taking its toll on UK commercial market

The Q3 2018 UK Commercial Property Market survey from the Royal Institute of Chartered Surveyors (RICS) found that while the commercial market in Scotland remained steady, held up by office and industrial sectors, the retail sector continued to decline with a noticeable rise in availability and inducements.

Breaking the three sectors down, demand from businesses looking to take-up retail space in Scotland fell for the tenth successive quarter, with the quarterly fall in demand the worst since December 2008, as a net balance of -60% of respondents reporting a decline. Alongside this, availability in the sector increased during Q3, with +60% reporting a rise in available units, prompting landlords to increase the value of incentive packages.

The decline in retail impacted the overall demand within the commercial sector, as office and industrial saw strong tenant demand, with +39% and +50% reporting an increase during the last three months respectively. Consequently, demand in the Scottish commercial sector was reported as steady, with a net balance of +10% more respondents reporting growth.

In each quarter since the Brexit vote took place, survey participants across the UK have been asked if they have seen any evidence of firms looking to relocate at least some part of their business as a result. Throughout much of this time, the proportion reporting they had seen signs of this type of activity remained at around 15-18%. Interestingly, however, this picked up to 25% in the latest national UK results. In Scotland results were more pronounced, with a net balance of 36% of Scottish respondents stating they have seen evidence of firms looking to relocate at least some part of their business as a result.

The subdued activity within the retail market means near-term rental expectations were firmly negative, with a net balance of -56% of chartered surveyors predicting a fall in retail rents ahead of Christmas. The retail sector continues to exhibit negative rental projections across all parts of the UK. However, results for prime office space were more positive with respondents expecting rents to increase across this sector and the industrial sector over the next quarter.

Looking to investments, enquiries rose most firmly in the Scottish office sector, with a net balance of +47% reporting a rise, which is up from +19% in Q2. Investors do however, continue to shy away from the retail sector. Overseas investment demand in the Scottish commercial market remained largely unchanged overall, albeit a small increase was cited for industrial assets.

On a UK level, the twelve-month capital value expectations remain steeped in negative territory across the retail sector, with respondents foreseeing price declines for both prime and secondary assets. Capital value projections remain modestly positive for prime offices, but the outlook for secondary has turned slightly negative. Given the supply demand dynamic, prime and secondary industrial values are again posting solid gains over the year ahead.

Tarrant Parsons, RICS economist, said: “The commercial real estate market continues to be characterised by a stark contrast between the struggling retail sector and the strong performance of industrial and prime office property.

“The uncertainty engendered by the ongoing Brexit process now appears to be having a greater bearing on tenant decisions when it comes to taking up commercial space, with a lack of clarity regarding the final trading relationship causing some hesitancy. That said, investment activity remains reasonably solid, as the latest results point to a stable quarterly trend in demand and a continued decline in supply.”