The weakening outlook across the wider economy is predicted to weigh on the industry going forward, as an increasing number of surveyors link market conditions to the beginning of a downturn.
The latest RICS UK commercial property survey for Q2 showed 43% of surveyors sensed the market is entering the early stages of a downturn. This compared with a 53% majority of surveyors who felt the market was in the early to middle stages of an upturn last quarter – a share that has since fallen to 22% in Q2.
A net balance of -42% of respondents cited a deterioration in credit conditions that has dampened momentum behind investor activity, on the back of interest rate hikes in recent months.
The numbers are a reflection of how many respondents reported a rise in occupier demand. A positive score means more respondents saw an increase. A negative score means more respondents saw a decrease.
Investment enquiries slowed, with the headline net balance for demand standing at +12%, compared with +32% last quarter.
Investor demand for office space lost momentum, with the net balance slipping to -1% from +23% on the last quarter. Overseas investment demand fell back to -2%, from +4%.
Although occupier demand still increased across all sectors, it was not at the same pace as in Q1. Researchers highlighted declining occupier interest for retail space, with very modest growth for offices.
Tenant demand remained comfortable for warehouses, although RICS underlined that the latest net balance of +49% was the “least elevated” level since Q4 2020.
Office and retail vacancies continued to rise, returning net balances of +22% and +27% respectively. The report noted that rental growth expectations were therefore only in “modestly” positive territory.
The report said overall capital value expectations are flat for the next 12 months. However, those remained “comfortably positive” for both prime and secondary industrial.
Surveyors were also upbeat that capital values will continue to grow for alternatives such as multi-family residential, data centres, hotels, aged care facilities and student housing.
Tarrant Parsons, economist at RICS, said: “As the UK economy grapples against significant impediments to growth, the gloomier macro outlook appears to be dampening sentiment across the commercial real estate market.
“In particular, with the Bank of England sanctioning several interest rate hikes over recent months in an attempt to ward off inflation, respondents report that credit conditions are now tightening within the sector. This, in turn, appears to be weighing on investment activity, which lost some momentum at the headline level during Q2.
“Given interest rates are set to rise further from here, it appears the market may be at a turning point, with an increasing share of survey participants throughout the UK now feeling conditions are consistent with the early stages of a downturn.”
Phil Clark, chair of the RICS commercial property forum, said: “These new investment figures underline the challenges in attracting investment in an uncertain economic environment.
“It is vital that the UK government and private sector work together to attract investment and meet the challenge of sustainable placemaking in the built environment, supporting economic regeneration and providing jobs, and easing economic pressure on people across the UK.”
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