South: Industrial leads the way as investors still eye property market

Both investor and occupier demand for industrial units edged up during Q3 in the South East’s commercial sector, but there is still a significant difference between sectors with industrial clearly outperforming, according to the Q3 2017 RICS UK commercial property market survey.

In Q3, investment demand for commercial property continued to pick up across the region, with 18% more respondents seeing an increase (rather than decline) in investment enquiries. Demand growth was strongest in the industrial sector, while the retail sector saw no quarterly growth. As domestic interest increases, interest from overseas buyers also rose across the majority of the market during Q3. Alongside this, near term capital value expectations point to strong growth across industrial assets, a marginal rise in office prices, and little change for values across the retail sector.

Meanwhile, near-term rent expectations indicate firm growth in the industrial sector. Rent expectations in the office sector remain relatively flat and there is marginally negative decline for retail at the regional level. Looking further out, over the year ahead, rental expectations are positive for both prime and secondary industrial space, prime offices and to a lesser extent prime retail space. The outlook for secondary office space remains flat. Conversely, the year ahead rental expectations for secondary retail are firmly negative, with rents still anticipated to decline.

All-sector rent expectations in the near term are generally positive across the region and most parts of the UK – with London being the exception.  In the capital, negative expectations in office and retail cancel out positive expectations for industrial rent. Over the next twelve months in London a generally flat picture is being weighed down by secondary retail and office areas

In terms of valuations, across the region, a strong majority of contributors (52%) sense the market is fairly valued at present. However, 37% of respondents from the South East are now of the opinion that values are stretched relative to fundamentals, a steady increase on 16% who were taking this view three quarters ago. Central London continues to exhibit the highest proportion of respondents viewing the market to be overpriced to some extent (67%).

Finally, during Q3, although views remain mixed, the largest share of contributors feel conditions are consistent with the peak of an upturn (35%). In Central London, 73% of respondents sense the market to be in some stage of a downturn.

Simon Rubinsohn, RICS chief economist commented: “The feedback to the Q3 survey reflects some of the broader macro issues, with the underlying momentum in the occupier market a little firmer further away from the capital. This is also mirrored in valuation concerns with around two thirds of respondents viewing the London market as being dear.

“A key issue going forward will be how the market responds to the likely first interest rate rise in a decade next month. Given that expectations are only for a modest tightening in policy, the likelihood is that it will be able to weather the shift in the mood music. But this remains a potential challenge if rates go up more than is currently anticipated.”

Dave Waters of Southampton-based agency Waters Surveyors commented: “The market appears to have remained stable. There does remain a great deal of uncertainty, though investors and occupiers appear to have remained positive and operate in a progressive manner. The lack of speculative development is resulting in rents and capital values for prime/good quality stock increasing. The retail market appears to have stagnated.”