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South East: RICS reports post-Brexit tumble in commercial-property market

28 July 2016
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The RICS UK commercial market survey for the second quarter, based on responses collected after the Brexit decision, shows that investment demand has weakened in the region; that an increasing share of respondents across the South East now feel the market is in an early downturn phase; and that the 12-month capital-value and rental projections have moved into negative territory. Both the investment and occupier sides of the market have thus been affected by the change in sentiment.

The largest share of respondents across the South East (35%) feel the market is now in the early stages of a downturn. During Q2 2016, investment enquiries fell notably across the region with the net balance falling to -7% following +27% in Q1.  This is the largest quarter-on-quarter deterioration in the reading for investment demand since 2007. All sectors covered by the survey suffered a drop in investor demand, and foreign investor appetite declined at an even quicker rate with 20% more respondents to the survey seeing a drop in interest, the fall being most pronounced in London with the investment enquires indicator posting the lowest reading since 2009 (41% more respondents saw a drop in demand for commercial real estate).

With investment demand falling right across the UK, capital values are expected to decline, albeit modestly, over the year ahead in almost all areas of the market.  Nevertheless, in the South East, capital value projections remain more or less flat for the year ahead.

Chris Ridge, of London Clancy in Southampton, remarked: “We expect lower levels of transactional business over the next 3-6 months due to uncertainty over Brexit.  This will apply to both occupier and investment sectors.”

Political and economic uncertainty is also hitting confidence on the occupier side of the market. In the South East, the indicator for occupier demand weakened as the net balance fell from +15% previously to a reading of +1% in Q2. A cautious demand backdrop is producing significantly weaker rental projections. Only 2% more contributors expect to see rents rise in the next three months. This stands in contrast to Q1, when 29% more respondents anticipated rents would increase in the near term.

When broken down by sector, the reading for offices is now in negative territory.  In the industrial sector, rent expectations remain positive due to lack of supply and a more resilient demand picture.

Jeff Matsu, RICS senior economist, commented: “Following several years of strong capital-value and rental gains, momentum had already appeared to be slowing prior to Brexit. Whether or not the sharp deterioration in the RICS survey data is a kneejerk reaction that will unwind as the result is digested, or the start of a more prolonged downturn, remains to be seen.”


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