Political uncertainty clouding East Midlands commercial property market

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Occupier demand is declining in the office and retail sectors of the East Midlands commercial property market, but conditions in the industrial segment remain firm, according to the Q2 2017 RICS UK Commercial Property Market Survey.

Occupier demand fell into negative territory at the all-sector level during Q2, for the first time in four years, with the net balance of -7%.

The breakdown shows a disparity between the sectors with demand for offices and retail space exhibiting a decline, offset by strong growth (net balance of +53%) in demand for industrial property. The East Midlands continues to outpace the rest of the UK with demand in industrial space in 2017.

Near term rent expectations across the region display a similarly mixed picture. While the outlook for industrial space remains firm with 21% more respondents expecting to see a rise in rents, a flatter trend is expected for offices and the retail sector.

The drop in demand for retail space continues to be attributed by some respondents to the rise in recent years in online shopping. Furthermore, space available for occupancy rose in the retail sector for a seventh straight quarter.

On the flipside, a greater shift towards online shopping is supporting demand in the industrial segment, with respondents noting a squeeze in the supply for leasable space in this area – a prevalent trend since 2013.

Anecdotally, political uncertainty is cited as a key factor weighing on occupier and investor decisions, with hesitancy, now extending beyond the capital. Indeed, Brexit negotiations and the General Election resulting in a hung parliament are both seen to be clouding the outlook for commercial real estate.

Looking ahead, the less buoyant trend in tenant demand has yet to meaningfully impact on longer term rental projections where prime assets look likely to continue to deliver stronger rental performance.

Looking at the investment market, 24% more respondents cited a rise in investment enquiries during Q2 (rather than a decline). Mirroring the picture in the occupier market, enquiries in the office and retail sectors were little changed on the previous quarter but continue to rise in the industrial area of the market.

In terms of capital values, projections turned marginally negative in the retail sector and the office sector is moderating. In each instance, net balance expectations were the weakest since the immediate aftermath of the referendum. Conversely, expectations in the industrial sector remain comfortably positive.

Simon Rubinsohn, RICS Chief Economist said: “The commercial property market has enjoyed a good run and it is hardly surprising that we are now seeing a flatter trend emerge in the responses to the survey which chimes both with recent economic newsflow and the political environment. That said, the underlying picture remains fairly resilient which is highlighted by the fact that medium term rent expectations are still holding up particularly for prime space.

“The key issue for the market remains the interest rate outlook and despite some mixed comments from policy officials in recent weeks, it is hard to see a material shift in the Bank of England’s approach anytime soon.”