Growing regional divide in commercial property market

Increasing regional variation in the UK's commercial property market became apparent during the three months to June, as London's real estate strongly outperformed the rest of the UK, says the latest RICS UK Commercial Market Survey.

Strong differences in the levels of available floor space across the UK reflected the differing state of the market across the country. In London, availability stabilised at a net balance of +2 per cent; however, in northern England it rose to +22 per cent. Chartered surveyors in the north of the country attributed this to fewer companies looking for space, due to the economic downturn.

As a result of this growing availability, the number of incentive packages offered by landlords to secure a letting continued to increase in Q2, albeit at the slowest pace in almost four years. Throughout the UK, the Midlands and Wales saw the greatest number of incentives, whereas London experienced a fall, driven mainly by the office sector.

Despite the continuing upturn in demand for commercial property, surveyors remain pessimistic about rent expectations for the coming three months, reporting a net balance of -3. While negative, this represents the best reading since the third quarter of 2007. Perhaps unsurprisingly, the only area of the country to report positive rental expectations was London, largely buoyed by the strongly performing office sector. Occupier demand, particularly from the financial services industry, is growing rapidly in London while availability is falling in this segment of the market.

As a result of the capital's expanding office market, new development starts are now rising strongly, in sharp contrast to the rest of the UK. The Midlands and Wales saw the lowest number of development starts (net balance of -17 per cent), further reinforcing the regional divide.

Turning to the investment market, demand to purchase real estate across the country is continuing to edge upwards, but not enough to impact upon capital value expectations. 20 per cent more surveyors are projecting price falls rather than rises. Once again, however, the picture in London appears rather more upbeat.

Commenting, Simon Rubinsohn, RICS Chief Economist said: "The striking feature of the latest RICS survey is the divergence in responses we are receiving from London and the rest of the country. Moreover, this starkly contrasting picture is expected to persist for some time, reflecting the markedly different economic picture in the capital. While the London property market will continue to enjoy the trappings of recovery, in many other parts of the UK it could feel as if the icy winds of recession are continuing to bite.''