The commercial property market in the North East has seen a drop in confidence and investor demand following the Brexit vote, according to the latest RICS UK Commercial Property Market Survey. Both the investment and occupier sides of the market have been affected by the change in sentiment and both rent and capital value expectations have dropped.
During the second quarter of the year (Q2 2016) investment enquiries fell across the North East with only 18% of chartered surveyors in the region reporting a rise in investment enquiries – down from 27% in the first quarter of the year (Q1 2016).
All sectors covered by the survey suffered a drop in investor demand including retail, industrial and offices, and foreign investor appetite declined at an even faster rate with only 10% more respondents seeing a rise in interest (compared with 22% in Q1). The fall was 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 throughout the UK. Values in the secondary retail and office segments are expected to see the most visible decline.
Political and economic uncertainty is also hitting confidence on the occupier side of the North East’s commercial property market. Demand for all commercial property types fell during Q2 with no respondents (0%) reporting a rise in demand from potential occupiers. On a UK-wide basis, occupier demand failed to rise for the first time since 2012.
This lack of demand for commercial property is causing weaker rental projections across all areas of the UK, including in the North East. Rent expectations are most negative in London, with secondary retail rents expected to suffer the largest decline in the capital.
Nevertheless, the supply of much commercial property in the North East remains healthy, especially so in the industrial sector, and this should provide a certain degree of support to rents and capital values for the time being.
David Jackson of Jackson & Partners Commercial Property Consultants in Darlington said: “Market confidence was starting to return with reasonable take up, particularly of quality offices. There is a shortage of quality accommodation; however, values are not high enough to justify new development. In an area that is dependent on EU funding for most developments, it will be interesting to see what impact this will have on our region’s local market.”
Jeff Matsu, RICS Senior Economist, commented: “Political and economic uncertainty in the aftermath of the referendum result has clearly dampened sentiment in the commercial property market, with the tone becoming visibly more cautious right across the UK. Although the impact is widespread, the drop in confidence has been most pronounced in London.
“Nevertheless, following several years of strong capital value and rental gains, momentum had already appeared to be slowing. 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.”