New Research finds Confidence is Key for Commercial Property Markets

Posted on 24 October, 2011 by MOVEHUT

A survey of commercial property developers and other commercial property professionals has found that many now expect rents in London to fall into negative territory for the first time in twelve months.

The survey comes from the Royal Institution of Chartered Surveyors (RICS), an independent body regulating residential and commercial property professionals. The research, the UK Commercial Market Survey, covers the third quarter of 2011.

Over this period, occupier demand for commercial property in London was reported to have declined, following a rise over the previous two quarters of the year.

This comes at a time when commercial property availability in London is increasing. Commercial property in the London retail sector registered both the quickest jump in availability (15%) and the steepest fall (30%) in the London sectors surveyed.

The RICS said the resulting negative balance was down to surveyors observing an “uncertain outlook for the wider economy which is impacting negatively on demand”. Excluding London, the expectation is that any recovery in rents is likely to prove elusive and capital values away from London look set to “remain under pressure”. This is a message that has been repeated time and time again in reports and surveys reviewed here in this blog over the last year.

The RICS believes the sovereign debt crisis in Europe, which has engulfed Greece and threatens to spread to other EU member states, is a significant factor. The “wave of negative news flow” is cited as affecting a commercial property sector in which “confidence is clearly critical”. As we all know, it’s confidence that drives markets and, with the financial crisis ongoing in many parts of Europe and other economies further afield still not having recovered from the global recession, this is likely to be a major factor in the way many companies make their commercial property decisions in the future.

Outside of London, at a national level, commercial property rental expectations were most negative for offices. In London, respondents said the commercial property market for offices remains buoyant, citing the continued interest from foreign investors.

Commercial property landlords appear to be offering more inducements to prospective commercial property occupiers, particularly in the retail sector. Apart from London, inducements were more common in all commercial property sectors, across the regions.

Commercial property observations within London boroughs concluded that there was “a general lack of supply of good quality stock” in Kensington and Chelsea.

In Westminster, commercial property occupiers appear “to be very pessimistic about the economy, and as a consequence they are unwilling to accept the higher rentals, longer leases and fewer incentives” on offer there.

In the West End of London, “a continuing shortage of Grade A offices should keep rents level”.

In the City of London, “fragile confidence is likely to lead to a cooling of rental growth expectations”.

London in general has “limited supply in certain quality, location, and size bands” of commercial property.

In Ealing, north-west London, commercial property demand “is starting to improve with more deals”.

Respondents from the North of England’s commercial property market found a negative balance of supply exceeding demand in all commercial property sectors.

To gather this research, the RICS sent out questionnaires to commercial property organisations in London and throughout the UK. Respondents were asked to compare conditions in the commercial property market over the past three months with the previous period. Questionnaires were returned by 254 commercial property professionals. Data was divided into three commercial property sub-sectors: offices, retail and industrial property.

While this is still a very small-scale assessment of the market it does help to paint a picture of how commercial property professionals feel about the way their market is moving and where it is heading. London still seems able to ride the storm better than other regions, and global economic factors are still seriously affecting demand, but by keeping a watchful eye on the markets we will be able to report on progress in the commercial property sector, whether positive or negative, as the months go by.

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