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21/07/2016

Confidence drops in UK commercial property market – report

Words: Laura Edgar

The UK commercial property market has seen a significant drop in investor demand and confidence following the vote to leave the European Union.

The investment and occupier sides of the market have been affected by the change in sentiment while both rent and capital value expectations are in negative territory, says the Royal Institute of Chartered Surveyors (RICS).

The Q2 2016 RICS UK Commercial Property Market Survey states that although opinions are mixed, 36 per cent feel the market is now in the “early stages of a downturn”.

It also suggests that investment enquiries fell sharply across the UK, with net balance falling -16 per cent. In comparison, in Q1 the net balance was +25 per cent.

RICS says this is the “largest quarter on quarter deterioration in the reading for investment demand on record”.

On the occupier side of the market, occupier demand failed to rise for the first time since 2012, across the UK. The net balance fell from +21 per cent previously to a reading of zero in Q2.

“Political and economic uncertainty in the aftermath of the referendum result has clearly dampened sentiment in the commercial property market, with the tone becoming visibly more cautious right across the UK. Although the impact is widespread, the drop in confidence has been most pronounced in London,”

Jeff Matsu, senior economist at RICS, said: “Nevertheless, following several years of strong capital value and rental gains, momentum had already appeared to be slowing. Whether or not the sharp deterioration in the RICS survey data is a knee-jerk reaction that will unwind as the result is digested, or the start of a more prolonged downturn, remains to be seen.”

Following the release of the report, the British Property Federation (BPF) called on the government to consider policy measures that would support real estate.

These include:

  • Accelerate its proposed reform of business rates to support activity in the broader business economy.

  • Introduce a range of tax reliefs for build to rent development, including CIL relief, relief for modular construction, and SDLT relief for new build to rent developments on the condition that they will be let on tenancies of three years or longer with rent increases tied to inflation.

  • Maintain an absolute and continued commitment to devolution and public infrastructure investment in HS2, the East-West Rail Line, Crossrail 2, and an imperative decision on growing airport capacity.

Ian Fletcher, director of policy (real estate) at the BPF, said: “This is not the time for knee-jerk reactions, but commercial property and a number of the government’s priorities are interdependent. Ministers must closely monitor developments in the commercial property market and be ready to act in weeks, not months, if evidence continues of a slowdown in investment.

"Commercial property investment is not always an obvious priority for governments because its social and economic impacts are indirect, but construction and development activity flow from it, ultimately impacting on jobs and economic growth. In scenarios like this the focus is often on construction, but you don’t get construction without an investment client, so it is essential that government monitors fluctuations in investment very closely.”

Image credit | Shutterstock

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