RICS UK Commercial Market Survey 2022 Q1

The Q1 2022 RICS UK Commercial Property Survey results point to the market gaining momentum over the quarter, with demand growth accelerating in relation to both occupiers and investors at the headline level. Nevertheless, despite the general improvement in the survey results, contributors remain cautious on the outlook for the economy given pressures caused by rising living costs and higher interest rates.

Across the UK, a net balance of +32% of respondents reported an increase in occupier demand at the all-sector level. This is up noticeably from a reading of +16% in the previous quarter and marks the strongest return for this indicator since 2015. When disaggregated, the industrial sector continues to post the strongest pick-up in tenant demand, registering a net balance of +60% this time (virtually unchanged from +61% in Q4). Significantly, respondents cited a clear upward shift in demand across the office occupier market in Q1, with the net balance improving to +30% from -3% beforehand. For the retail sector, the occupier demand indicator moved into relatively neutral territory at -1%, compared to -23% in Q4.

With regards to supply, both the office and retail sectors continue to see an increase in the availability of leasable space, albeit the pace of this growth (in net balance terms) is significantly reduced compared to last year. For the industrial sector, vacancy rates declined further over the quarter, with the latest net balance coming in at -47%. Interestingly, at the all-sector level, the Q1 net balance of -9% is the first outright negative reading for the overall availability measure since 2017.

As a result, headline rental expectations for the near term moved further into expansionary territory during Q1, posting a net balance of +19% compared to +7% last time. This was mainly driven by the office sector, where the outlook turned from negative in Q4 to positive in the latest results (net balance -11% vs +9%). With respect to the next twelve months, prime office rents are now envisaged rising by
a net balance of +42% of respondents (up from +18% previously). That said, expectations are flat to marginally negative for secondary office rents. On the same basis, rents are anticipated to rise by a net balance of +81% and +66% of respondents for prime and secondary industrial space respectively in the year ahead. For prime retail, the negativity

around the rental outlook seen for some time has largely diminished, with the latest net balance of -14% the least downbeat return 2017. Even so, expectations remain steeped in negative territory for secondary retail, evidence by a net balance of -29% of contributors envisaging a fall in rents.

From a regional perspective, rental growth across the prime office market in Central London is anticipated to outpace most other regions over the coming twelve months. Interestingly however, the secondary office market in the South East now displays slightly positive annual rental projections, making

it the only region in which an upturn in the secondary office sector is expected.

On the investment side of the market, a net balance of +32% of contributors saw an increase in buyer enquiries at the all- property level during Q1. This is up from a reading of +19% in each of the past two quarters and is in fact the strongest figure posted since Q3 2015. Moreover, for the first time since 2017, the investment enquiries indicator is now in positive territory across each of the three traditional market sectors (office, industrial and retail), albeit only marginally so for retail.

In net balance terms, capital value expectations for the year ahead were revised higher (or became less negative) in both prime and secondary portions of the office and retail markets. For prime retail, the latest net balance of zero represents

the first non-negative return in almost five years. For the prime office sector, the net balance of +37% of respondents expecting a rise in capital values over the next twelve months is the firmest figure since Q4 2019. Meanwhile, although sentiment regarding the twelve-month capital value outlook across the industrial sector remains robust, the latest net balances edged down slightly from recent highs.

Turning to the alternative sectors tracked in the survey results, respondents envisage a firmly positive trend in both rents and capital values for data centres, multifamily residential, and aged care facilities over the year ahead. Furthermore, the outlook is also positive, albeit to a slightly more moderate degree, for student housing and hotels.

With respect to the latter, respondents now envisage a more consistent recovery progressing over the next twelve months having been hit hard by the pandemic since early 2020. 

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