The Q3 2020 RICS UK Commercial Property Survey results point to a highly varied near term outlook across different market segments. While offices and retail units continue to struggle against the challenges posed by the ongoing pandemic, the industrial sector is already showing solid signs of recovery.
On the occupier side of the market, a net balance of -33% of respondents reported a decline in tenant demand at the all- property level in Q3. Although still firmly negative, the latest reading is somewhat less downbeat than -55% returned in Q2. The sector breakdown shows a net balance of -73% of contributors saw a continued drop in occupier demand for retail space, while the corresponding net balance for offices came in at -66%. By way of contrast, occupier demand increased across the industrial sector, evidenced by a net balance of +22% of respondents noting a pick-up (improving sharply from a figure of -13% last time).
As a result, feedback continues to signal retail vacancies are rising sharply, with standard shops, shopping centres and department stores all seeing a significant increase since the onset of the pandemic. Likewise, across the office sector, availability is picking up at the strongest pace (in net balance terms) since 2009.
On the back of this, rental growth projections remain entrenched in negative territory for both of these market segments. Over the next twelve months, a net balance of -52% of respondents envisage prime office rents falling, while the latest reading stands at -64% for secondary. On the same basis, prime retail rents are envisaged falling by a net balance of -82% of contributors, with rental expectations across secondary retail locations returning a virtual identical figure of -81%. At the other end of the spectrum, survey participants now anticipate prime industrial rents rising firmly over the year to come (net balance +51%). Meanwhile the outlook is also positive, albeit modestly so, for secondary industrial rents.
Aside from the traditional segments, rental expectations are also highly varied across the more alternative commercial property classes. Unsurprisingly given the disruption caused within the tourism industry, hotels display amongst the weakest twelve-month projections for rents with contributors expecting a -8% fall. Conversely, rents for data centres are expected to post solid growth of 3% over the year ahead.
In terms of the latest investment market trends emerging, the all-sector net balance of -27% points to another quarterly decline in investment enquiries. Again, this is slightly less negative than last quarter’s reading of -46%, which can be attributed to an improvement in demand across the industrial segment. At the same time, overseas investment demand continued to fall across all areas of the market, albeit the drop was very marginal for industrials.
Twelve month capital value expectations are now comfortably positive for both prime and secondary industrial assets, returning net balances of +51% and +21% respectively. Similarly, respondents also anticipate values rising for data centres (net balance +46%) and aged care facilities (net balance +11%) over the year to come. Alongside this, projections are more or less flat for multifamily residential values, posting a net balance of +4%. At the weaker end of the scale, capital values are expected to post relatively steep declines during the next twelve months across all remaining categories covered, with net balance readings standing at -58% for offices, -80% for retail, and -83% for hotels.
With regards to the regional picture, sentiment on both the occupier and investment sides of the market is altogether more downbeat across London in comparison to the national average. Notwithstanding this, the overarching patterns of negative rental and capital value expectations for offices and retail properties, alongside positivity for industrials, is mirrored throughout all regions.
Across the UK as a whole, 78% of respondents view the market to be in a downturn. This is broadly in-line with the 76% share who were of this opinion back in Q2. As yet, there not been any rise in the proportion of survey participants sensing the market has reached a floor.
A series of extra questions were included in the Q3 survey to gather insights into certain issues around sustainability, Contributors were asked how both occupier and investor demand had changed for buildings with Green Certifications over the past twelve months. Overall, a net balance of +36% of respondents reported that occupier interest in Green Certified buildings had increased. For investors, the rise in demand appeared slightly stronger, with the net balance coming in at +43%. Finally, the largest share of respondents feel that while there is no price or rent premium for Green Certified Buildings currently, those without such certifications are subject to a brown discount. A full breakdown on the sustainability extra questions can be found on page 5.