Interest from international investors in UK commercial property slowed for a second consecutive quarter in the last three months of 2015, despite the market still being perceived as a safe haven for investors with rents and capital values set to continue rising.
As the supply and demand balance continues to push rent and capital values skyward, 81% of central London respondents to RICS latest UK Commercial Market Survey now view the market as overpriced – up 4% on the previous quarter. With limited scope for yields to fall further, rental growth will have to take over as the main driver of investment activity in central areas of the capital.
Simon Rubinsohn, RICS chief economist commented: “For the time being the real estate sector seems largely insulated from the turmoil affecting financial markets. Indeed, the prospect of a ‘low for longer’ interest rate environment provides further comfort for those parts of the property market where values are looking a little stretched and arguably more vulnerable to a material shift in monetary policy.
“One potential consequence of the current climate is that the trend in foreign investment could slow which is a pattern the latest RICS survey seems to be picking up. However, with the economy still set to post growth in excess of 2% in 2016 the backdrop for the occupier market appears reasonably well underpinned.”
With businesses across the UK thriving and employment data still strong, RICS revealed the industrial sector has the greatest momentum in occupier demand; 43% more chartered surveyors are seeing a rise in demand for industrial space in Q4 2015, compared to 29% more seeing a rise rather than fall in demand for offices and 26% more seeing a rise in demand for retail.
As demand increases, supply has continued to decrease across the UK with the survey recording the eleventh consecutive quarterly drop in available space across the commercial property market.
Development nationally has only increased marginally with anecdotal evidence suggesting that there is a lack of commercial construction activity in many locations.
As the survey indicated, the deepening skills crisis is playing a key role in inhibiting development. One notable exception to the low level of new build across the UK is in the London office sector, where development has risen sharply over the last three quarters. 34% more surveyors saw a rise rather than fall in office development starts in the quarter.
In the face of continued demand and lack of supply, rent expectations for the next quarter are strongly positive across all sectors with 35% more chartered surveyors projecting a rise in rents across all sectors. Industrial space was again the strongest performer with 43% more surveyors envisaging a further rise rather than fall in rents.
