Q3 2015: RICS UK Commercial Property Market Survey

The Q3 2015 RICS UK Commercial Property Market Survey again shows a healthy rate of demand growth across both occupiers and investors, with improvement continuing all over the UK. Available supply, however, remains firmly in decline. Current market dynamics therefore continue to place significant upward pressure on rents and capital values.

Focusing on the occupier market, survey feedback indicates demand from tenants continued to rise for a twelfth quarter in succession. Each of the three traditional sectors (office, industrial and retail) recorded a firm pick up in demand during Q3, albeit improvements in retail remain more modest in comparison. Alongside this, availability of leasable space contracted once more, marking the tenth consecutive quarter of declining supply.

Unsurprisingly, in an additional question included in this quarters’ survey, respondents from the South East and London expressed differing views to those from the rest of the UK, regarding the effect of Permitted Development Rights (PDR). PDR allow the conversion of offices into residential without the need to seek planning permission. Indeed, when asked how much conversion into residential space was weighing on supply, 57% of contributors nationwide (excluding London and the South East) felt it was having no effect, while 10% reported the impact was substantial. In London and the South East, 39% and 35% respectively felt space lost to residential was substantially bringing down supply.

What’s more, 59% of UK respondents (minus London and South East) feel PDR should be made permanent, against 23% who were against the idea (18% did not know). Whereas, in London, 56% were against PDR becoming permanent while only 22% approved. In the South East the picture was more balanced, with 46% in favour and 48% opposed.

Whatever the impact of PDR, demand growth continues to heavily outpace that of supply, ensuring headline rental expectations remain elevated. As such, rents are anticipated to post further solid gains in all sectors over the quarter ahead, with growth in the office and industrial segments projected to be particularly firm. When viewed at the regional level, rental projections remain strongest in London both in the near term and over the next twelve months. Even so, all-sector rents are expected to rise, to a greater or lesser degree, across all parts of the UK.

Meanwhile, investment market conditions were reported to have improved once more in the latest results as investor demand grew across each sector. Likewise, interest from foreign buyers increased steadily. That said, both the total investment and overseas enquiries series signalled a slight moderation in the rate of growth during Q3. The supply of property for sale dipped notably across the office and industrial sectors but remained more or less unchanged for retail. As a result, demand continues to outstrip supply growth comfortably across all areas of the market.

Accordingly, each sector is expected to see capital values rise materially in the near term and to continue to do so over the next twelve months. Given the slightly softer nature of fundamentals, retail property is projected to see more modest growth in values relative to office and industrial, albeit retail sector growth is still expected to accelerate. When disaggregated from the national level, three month capital value expectations are most buoyant in East Anglia, London and the North East (in net balance terms). Elsewhere, capital value expectations remain comfortably in positive territory right across the UK.

Nationally, a weighty majority of 85% of respondents view current pricing levels to be either at or below fair value at present. That said, this figure has in fact edged down relative to Q2, when 90% of the total respondents were of this opinion. In London, 62% of contributors now sense the market is becoming overpriced to some extent (the figures jump to 73% for central London). This marks a noticeable increase from the 50% who took this view in the previous survey.

These results are broadly in line with members’ perception of the stage their market is currently at in the property cycle. Indeed, a large share of central London respondents (37%) believe the market is approaching its peak, while 44% think their market is in the middle phase of the upturn.