Rental expectations highest in over six years

Business demand for commercial property remained firm in the second quarter propelling rental expectations to a 6 and a half year high, while a geographical split has emerged in the retail sector, says the latest RICS’ Commercial Property Survey.

13 percent more Chartered Surveyors reported a rise than a fall in overall demand, down slightly from 16 percent in the last quarter. Despite recent reports of an imminent retreat from the market as swap rates have risen, investor demand for commercial property assets is still strong and rising across all sectors.

A geographical split is emerging, however, in the retail market with investment and occupier demand in London picking up whilst declines were apparent across most other UK regions. The booming financial services economy has led to a break away of the London market as a confident labour market refuses to bow to rising interest rates in the Capital.

Strengthening demand conditions in both the office and industrial markets and a notable turn around in London retail have boosted surveyors optimism further with the outlook for future activity solid. A strong global economy and the ongoing recovery of the Euro zone are supporting the Industrial market with demand rising at the fastest pace in seven years.

The outlook for the market remains bright despite the negative gloom that has surrounded the sector in recent months. New enquiries to occupy commercial property rose at the fastest pace in over two years with the biggest step up in inquiries occurring in the industrial market. Investor demand for commercial property is still rising, indicating that investors are not fleeing the sector in their droves due to yield differentials with other asset classes. London in particular is showing a great deal of resilience as investors focus on strong rental growth prospects with near record highs recorded across all sectors in the second quarter.

RICS commercial property spokesperson, Ian McRae said: “Record rental expectations offer investors some comfort that continued growth will support returns. The global economy is supporting the commercial property sector and investor appetite for the asset class has not dried up.

“The London economy is pulling away from the rest of the market with commercial property dynamics showing a strong divergence in the capital, particularly in the retail market. Consumer spending in London remains strong but interest rates hikes have started to take affect elsewhere causing a slowdown in retail demand.”