As would be expected given the ongoing Covid-19 outbreak, the Q1 2020 RICS UK Commercial Property Survey results point to a sharp deterioration in market sentiment. Following what appeared to be a promising start to the year through January and February according to anecdotal evidence, social distancing measures and forced business closures have severely restricted activity and will unfortunately continue to weigh heavily on the outlook over the coming months.
In terms of trends in occupier demand over the past quarter, a headline net balance of -24% of respondents saw a decline, down from a reading of -12% in Q4. That said, it is important to point out that social distancing measures were ramped up significantly in the middle of the survey collection window. As such, while indicators capturing changes in tenant demand in Q1 as a whole returned net balances of -67% for retail, -16% for offices and +6% for industrials, these readings fall to -82%, -44% and -7% respectively when only taking into account submissions received from 1st of April onwards (on an unweighted basis).
Alongside this, availability and inducements both continued to trend upwards at the headline level,
with the retail sector seeing the sharpest rise in both variables in net balance terms. With regards to near term rental expectations, a net balance of -69% of survey participants envisage retail rents falling, while the figure stands at -24% for offices. Rents across the industrial sector meanwhile are expected to prove more resilient, with a much flatter near term assessment returned by contributors.
For the next twelve-months, rental projections turned negative in virtually all sub-sectors to a greater or lesser degree. Secondary retail rents are now seen falling by close to 12%, while the outlook is not much better for prime retail rents at -8%. At the same time, secondary office rents are now anticipated to decline by around -4% over the coming year. Again, sentiment has proved relatively firmer for the industrial sector with prime rents still expected to rise marginally according to the Q1 results in full. Having said that, focussing solely on the responses received from the 1st of April points to a flat outlook for prime industrial rents and a negative trend for secondary.
On the investment side of the market, overall enquires continued to slip, as negativity in the retail sector remained particularly prominent (although investor demand for offices also fell in Q1). At the same time, overseas investment demand declined in each area of the market over the quarter. Alongside this, the supply of property available on the sales market was more or less unchanged at the headline level in Q1, albeit there was an increase across the retail sector.
Capital value expectations for the coming three months fell from a headline net balance of -3% in Q4 to -35%
in the latest figures. When broken down, expectations are negative across all sectors, with the net balance standing at -32% for offices, -8% for industrials and -71% for retail values.
When viewed at the twelve-month horizon however, prime industrial values are still expected to post modest capital value growth (even when survey returns before the start of April are excluded). Meanwhile, the outlook for secondary office values is noticeably weaker than for prime, although expectations for the latter also slipped deeper into negative territory towards the end of the survey collection period. For retail, already steeply negative twelve-month capital value projections deteriorated further, with both prime and secondary retail sub-markets returning the weakest projections since this series was formed in 2014.
On a more positive note, three-year capital value expectations point to an improvement in the office and industrial sectors further ahead, although respondents do not currently envisage any respite across retail.
Looking at the full Q1 sample, 64% of respondents nationally now view the market as being in a downturn, with this share rising to 78% when only submissions after 1st April are analysed. Unsurprisingly, all parts of the UK display a strong majority of respondents reporting their local market is now in some stage of a downturn.