RICS Commercial survey: industrials still in demand as retail fails to pick up

Sector conditions in the South West’s commercial property remain highly varied, with industrial property seeing solid growth and retail continuing to show little sign of improvement according to the Q1 2019 RICS UK Commercial Property Market Survey. Alongside this, anecdotal evidence suggests a lack of movement on Brexit continues to deter investors and occupiers across the board.

Demand from occupiers for commercial property in the South West saw an overall decline over Q1 2019. However, the decline has stemmed from the retail sector, where 54% more respondents reported a fall rather than rise in demand. Occupier demand for office space was broadly stable, having weakened slightly in Q4. Meanwhile, the industrial sector (including warehouses), continued to see a steady rise in tenant demand.

As demand for industrial space rose, the number of vacant units continued to decrease, contrasting with the sharp rise in availability across the retail sector. The number of vacant retail units has been increasing over the past 18 months. Respondents also cited a slight rise in office availability during Q1, for the second consecutive quarter. This has consequently seen incentive packages from retail landlords pick up. 48% more respondents saw a rise rather than fall in retail inducements.

Simon McKeag MRICS, ASH Chartered Surveyors, commented: “Industrial demand remains strong and there is a lack of supply in both that sector and offices. Retail market has weakened which reflects the wider economy and change in consumer buying habits.”

Contributors are still anticipating further growth in rents across prime and secondary industrial markets over the next twelve months. Meanwhile, for offices, there remains a clear split between prime and secondary, with the former expected to deliver steady rental growth whereas for secondary office space rental growth projections are marginally negative. When viewed at the regional level, the pattern of positive rental growth expectations for industrials and negative views for retail is replicated across all parts of the UK.

As the Brexit debate rumbles on, domestic investment enquiries for commercial property, at the all sector level, have declined for two successive quarters. Retail was responsible for most of this decline, however, investment enquiries also fell modestly for offices. Meanwhile, buyers are still keen for industrial units and investment demand for this sector remained positive. Prime industrial assets are predicted to post the strongest capital value gains on a sectoral comparison over the coming year.

Looking across the market, 52% of respondents nationally continue to sense conditions are consistent with the early to middle stages of a downturn, virtually unchanged from Q4.

In each quarter since the Brexit vote took place, survey participants have been asked if they have seen any evidence of firms looking to relocate at least some part of their business as a result. In each of the two previous quarters, the proportion reporting they had seen signs of this type of activity came in at around 24%. Interestingly, however, this picked up to 33% in the latest results. Going forward, a slim majority (53%) of respondents nationally do now expect relocations to occur. Of course, whether or not firms do decide to relocate will still depend on how the negotiations unfold from here on.