Commercial property malaise deepens

Seventy one per cent more Chartered Surveyors reported a fall than a rise in occupier demand compared to 53 per cent in Q3 2008. All sectors remain firmly in negative territory for the fifth consecutive quarter and have reached their lowest respective balances in the survey's history. The worst hit area continues to be the retail sector with 78 percent more Chartered Surveyors reporting a fall than a rise in retail demand, compared to 59 percent in Q3. Rising unemployment has further dampened the outlook for consumer spending through 2009 which has added to the sense of pessimism in the retail sector, where several high profile bankruptcies hit the headlines in the run up to Christmas.

Declines in the rate of new development completions have failed to halt a further loosening in supply. 67 percent more Chartered Surveyors reported a rise in available floor space compared to 47 percent in Q3. Bargaining power is increasingly shifting towards tenants who are looking to exercise shorter leases and earlier break clauses given the wider economic uncertainty.

The value of inducements (a lead indicator of rents), rose at the fastest pace in the survey's history as landlords tried to counter falling demand with incentives. In fact, confidence towards the rental outlook fell to the lowest level since the survey began with pessimism bleakest in Central London.

Despite recent government initiatives, the immediate outlook for lettings activity remains poor as the net balance of surveyors reporting new occupier enquiries in Q4 declined to yet another record low. 62 percent more Chartered Surveyors reported a fall than a rise in new enquires for business space compared to 55 percent in Q3.

In the investment market, capital values fell at the fastest pace to date. However, there are some tentative signs that transaction activity may be due to bottom, albeit at very subdued levels, with less surveyors reporting declines in purchasing activity, particularly in the office sector.

Commenting, Oliver Gilmartin, RICS senior economist said: "Concerns as to the depth and duration of the current downturn are being reflected in the commercial property market where investment has been dramatically scaled back.

"New Government packages such as loan guarantees schemes and the separation out of toxic assets are welcome developments for both corporate occupiers and investors into commercial property, although will not prevent a further near term weakening in rental prospects on rising space.

"The collapse of sterling and improved valuation metrics compared to continental Europe could encourage some investment interest, as the year progresses. There is already real evidence of this with increasing number of opportunity funds being set up"