Uncertainty leads to downturn in region’s commercial market property cycle
The Brexit impasse is contributing to perceptions that the West Midlands’ Commercial Property Market is in the downturn phase of the property cycle, according to a report out today.
The Q3 2019 RICS UK Commercial Property Market Survey shows the highest proportion of respondents sensing the overall market is in the downturn phase of the property cycle since the series began in 2015 (+63% up from +55% in Q2), with anecdotal evidence suggesting that Brexit is having an increasingly detrimental impact on market activity.
Tenant demand for the region’s commercial property fell at the headline level once again, with the net balance slipping to -28%, from -6% previously. The region’s retail sector continues to struggle the most (net balance -67% compared to -57% in Q2) but this quarter saw demand for office space also fall, (net balance of -22% compared to +5% in Q2). The West Midlands industrial sector was the only sector to see any interest this quarter, although the increase was marginal, as the net balance came in at +4% (down from +34% in Q2).
With less demand for the region’s industrial property, the availability of leasable space in the industrial sector improved in Q3. This marks a slight departure from the uninterrupted run of declining supply being reported since 2013. The region’s retail sector continues to have more vacancies coming to market, prompting another increase in incentive packages on offer to prospective tenants. Incentives are also on offer in the office sector as the availability of office space rose once again.
Interest in investing in the West Midlands’ commercial property market fell at a faster pace this quarter too, with -17% more respondents seeing a fall in investment enquiries. Investment enquiries from overseas also fell this quarter with a net balance of -15%, marking the poorest reading in five years, when the question was introduced.
Looking to the next three months, respondents to the survey project that rents will rise in the industrial sector and unsurprisingly, fall in the retail sector – some 60% of respondents expect to see further reductions in rents across retail, the lowest reading since Q4 2011. In the office sector, respondents expect to see little movement in current rent levels.
Looking further ahead, survey respondents expect further cuts in rents for the West Midlands’ retail sector in the coming year. Industrial property continues to be the biggest attraction in the region and 48% of respondents expect to see rents rise for industrial space in 2020. Looking at the office sector, 10% of survey respondents anticipate rents to rise, driven primarily by primary office space.
Tarrant Parsons, RICS economist, said: “Although a clear majority of respondents now perceive the market to be in a downturn, the fact that capital value expectations are still positive in many parts of the country suggests a relatively soft landing for the commercial real estate sector is anticipated overall. That said, the fallout for retail is altogether more severe. It remains to be seen what impact the latest Brexit developments have on confidence across the sector, but with the picture unlikely to become clear until into the New Year it may well mean hesitation continues over the near term.”
