The Q4 2020 RICS UK Commercial Property Survey results continue to portray a challenging set of conditions overall, with many parts of the real estate sector still struggling against the economic pressures caused by the pandemic. That said, this headline assessment does not apply to the industrial sector, which, supported by more favourable structural dynamics, has seen activity strengthen once again in Q4.
On the occupier side of the market, a headline net balance of -27% of contributors reported a fall in tenant demand over the quarter. On the face of it, this decline appears less severe than in Q2 and Q3, when net balances of -55% and -33% were posted. However, the disaggregated figures show the latest readings remain steeped in negative territory across both the retail (-78% net balance) and office sectors (-63% net balance). Meanwhile, the industrial sector was solely responsible for driving the slightly less negative headline reading, with a net balance of +41% of respondents citing an improvement in occupier demand (up from +22% last time).
This contrast in fortunes is also evident in the data on availability, as the retail sector posted the sharpest uptick in vacant space (in net balance terms) since the series was formed in 1999. Likewise, the availability of lease-able office space rose at the strongest rate since the global financial crisis. Unsurprisingly, incentive packages on offer to tenants were increased significantly in both cases during Q4. At the other end of the scale, industrial availability continued to contract, with the latest net balance falling to -35% from -14% last quarter.
In keeping with the tightening supply backdrop, twelve-month rental growth expectations were upgraded across the industrial sector. Both prime and secondary industrial rents are seen posting solid growth, returning net balances of +66% and +35% respectively (rising from +51% and +18% previously). At the same time, twelve month rental projections showed no sign of improvement across retail, registering net balances of -84% for prime (-82% in Q3) and -83% for secondary (-81% in Q3) . Similarly, expectations remain downbeat across the office sector, with a net balance of -44% of respondents anticipating a fall in rents for prime office space, and -63% foreseeing a fall in secondary rents over the year to come.
With regards to feedback on the investment market during Q4, a headline net balance of -12% of survey participants noted a decline in buyer enquiries. This latest reading is in fact the least negative since Q4 2019, although it must be highlighted that demand continues to fall sharply in both the retail and office markets, while strong growth in demand across industrials is off setting a lot of the weakness at the headline level. Furthermore, overseas investment enquiries for UK industrial assets also picked up in Q4, marking the first positive reading for this indicator since Q3 2018.
Buoyed by this rise in demand, twelve-month capital value expectations were revised higher across the industrial sector relative to Q3. Indeed, the net balance of respondents envisaging capital value gains rose from +51% to +67% for prime assets and from +21% to +38% for secondary. On the same basis, expectations turned slightly less negative regarding prime office values, moving from -50% to -35%. That said, projections for capital values across the secondary office market saw no improvement, posting a net balance of -64%. By the same token, expectations remain deeply negative across the retail sector, with the latest net balances coming in at -81% for prime and -85% for secondary.
These national trends are replicated at the regional level, with the outlook for the retail sector bleak across all parts of the UK. If anything, the office market in London (particularly in secondary
locations) appears under slightly more pressure than in other parts of the UK, albeit office capital value expectations are negative to some extent across the board. The industrial sector meanwhile continues to strengthen in each UK region/country according to the latest feedback.
Looking at some alternative commercial real estate asset classes, both rents and capital values are seen falling sharply across the hotel sector in the coming year. Meanwhile, expectations are also firmly negative for student housing over the same time frame. Multifamily housing displays a flat to marginally positive outlook for both rents and capital values, while aged care facilities and data centres are anticipated to see solid growth in the year to come.
In aggregate terms, the majority of respondents (63%) still consider the market to be in a downturn phase of the property cycle. Notwithstanding this, the Q4 results did show noteworthy shift in the share of contributors sensing the market may now have reached a floor, rising from just 7% last quarter to 19% this time out.