South East: Demand for offices and retail space continues to fall

Office and retail property in the South East continue to struggle with a further fall in demand, but industrial property is already showing solid signs of recovery, according to the latest RICS UK Commercial Property Survey.

The decline in demand continued in the last quarter, as a net balance of -40% of local respondents reported a fall in tenant demand at the all sector level. However, although the figure is firmly negative, this reading is less downbeat than Q2 2020.

Unsurprisingly, demand for South East retail space continued to fall with a net balance of -76% of local contributors reporting a drop. Demand for the region’s office sector also saw a fall with -55% reporting the drop. In more positive news, occupier demand has turned positive across the South East industrial sector. A net balance of +11% respondents noted a pick-up this quarter, up from -22% reported in Q2.
As demand drops, availability of retail property in the UK is unsurprisingly rising sharply. Space available in standard shops, shopping centres and department stores has increased significantly since the onset of the pandemic. Likewise, across the office sector, availability is picking up at the strongest pace (in net balance terms) since 2009. Availability in the region’s office and retail sectors therefore grew, whilst the growing demand for industrial space saw -6% of respondents reporting a decline in available industrial space.
The South East’s rental growth projections remain in negative territory for the office and retail sectors. Over the next year, prime office rents in the region are expected to fall by 3.3%. In the same time period, prime retail rents are predicted to fall by 9.6%. In contrast, local participants in the survey anticipate prime industrial rents to rise by 1.5% in the year to come.
Aside from the traditional segments, rental expectations are highly varied across alternative commercial property classes. Hotels in the South display the weakest 12-month projections for rents with -70% contributors expecting a fall.
Student housing is also expected to see a fall, but 46% of Southern contributors expected rents for data centres to post solid growth over the year ahead. This sees respondents anticipating capital values rising for data centres (net balance +43%) over the year to come.