Larger proportion of survey respondents now feel that the market has already bottomed out
There is a growing sense of confidence in the long-term prospects of the commercial property market during the last quarter of 2023, according to the Royal Institution of Chartered Surveyors (RICS).
RICS has revealed that 33% of those who were asked about the conditions of the market believe that it has already reached its bottom, contributing to a cautiously optimistic outlook.
Despite an overall sluggish market with limited momentum, there were signs of improvement. Occupier demand, while still negative at -7%, has shown a slight improvement from the -12% recorded in Q3 2023.
RICS, in its latest Commercial Property Monitor, noted that while the office and retail sectors continue to face challenges, sentiment has seen a positive shift since Q3. Industrial demand, while still positive, has experienced a decline from previous highs.
Prime properties continue to outperform secondary units. Prime retail rents, for instance, have stabilised, with the 12-month expectations net balance improving from -13% in Q3 to -4%. This marks the most optimistic view on prime retail rents since Q1 2018, indicating positive momentum.
Regionally, the national trend is mirrored across most parts of the country. London, however, stands out with strong rental expectations in prime office and retail markets, both firmly in positive territory. In contrast, secondary office space in the capital is facing increased pressure. The Midlands, particularly in the industrial sector, shows notable strength.
Despite these positive nuances, overall investment demand remains relatively soft. The all-property investment enquiries indicator reports a net balance reading of -19%. Similarly, overseas investment enquiries have declined across all sectors in Q4. Last year, RICS has called for a national real estate roadmap that attracts foreign investment on a broad scale, providing holistic benefits to the entire economy, as outlined in its Manifesto for the Built Environment.
Credit conditions, on the other hand, have seen a notable improvement in sentiment, with a much flatter -5% reading compared to the significantly more negative -44% and -75% seen in Q3 and Q2, respectively – a shift that suggests a more stable credit environment in the commercial property sector.
“Current conditions remain challenging across the UK commercial property market, with investor demand still being weighed down by the tighter lending climate and uncertain outlook for values,” commented Tarrant Parsons, senior economist at the Royal Institution of Chartered Surveyors.
“At the same time, relatively weak momentum with respect to economic activity more generally is taking its toll on tenant demand, with the ongoing structural challenges facing parts of the office and retail sectors also hampering market sentiment.
“That said, the significant turnaround in expectations for monetary policy of late provide a reason for cautious optimism going forward, and the latest results do point to a more stable backdrop for credit conditions coming through this quarter.”
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