Investors snubbing UK commercial property as market enters downturn, says RICS

Investors are turning away from the UK commercial property market as tenant demand sank in the third quarter.

According to RICS’ latest Commercial Property Survey, five successive quarters of growth came to an end in between July and September, with demand falling to a net balance of -10%, down from +17% in Q2.

Virtually all parts of the UK experienced a downward trend for tenant demand in office and retail space, with 81% of respondents saying the market is in some stage of a downturn.

Only industrial space sustained positive demand (+21%), though figures have eased in each of the last three surveys from the +61% posted in the last quarter of 2021.

Buyer enquiries were at a net balance of -18%, the weakest return for this metric since the beginning of the pandemic.

Tarrant Parsons, RICS economist, said deteriorating economic conditions were having an “increasingly noticeable” effect on the market, with rising interest rates weighing on investor demand.

In September, the Bank of England increased interest rates by 0.5% to 2.25% in an effort to curb inflation and some analysts have predicted rates could rise to 6% next year. Its next decision on interest rates will be made a week today (3 November) ahead of the government’s fiscal statement which has been rescheduled from 31 October to 17 November.

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“The weaker survey feedback is particularly evident in the retail sector, as the cost of living crisis and falling consumer confidence takes its toll on household spending,” Parsons added.

“Likewise, the office sector has also seen a renewed decline in demand, with ongoing structural changes to working patterns brought about by the pandemic further exacerbating the broader cyclical downturn in the economy.”

The consequent rise in leasable office and retail space has pushed landlords to increase incentive packages to tempt prospective tenants.

Nine in 10 respondents expected businesses to scale back at least some of their office space in the coming year, with a third believing this reduction will be between 5% and 10%.