Rental expectations fall as demand dips and availability rises – RICS
RICS says commercial property rental expectations have fallen to their lowest since Q3 2009 as a result of lower occupier demand and the increasing availability of commercial property to let. Significantly, London and the south of England no longer appear to be immune to the negative conditions felt elsewhere in the UK, RICS says – the market for office space in Central London, which was buoyant during H1 2011, recorded a fall in occupier demand during the final quarter, for the first time in 18 months.
The RICS UK Commercial Market Survey for Q4 2011 shows a net balance of –13% for occupier demand, meaning that 13% more surveyors reported decreases in demand from prospective tenants than increases. Demand for office space to let in London slumped to a net balance of –19%. RICS says the mood among surveyors deteriorated across all sectors of the commercial market during the quarter, with retail and offices suffering the most as the net balances for tenant demand and for expected rents fell further into negative territory.
As demand fell, floor space availability rose, with the net balance remaining at +16%. Availability for office space and retail premises rose at the fastest rate, with net balances of +25% and +24% respectively, while availability of industrial property was broadly stable at a net balance of +3%.
The fall in requirements and the increase in available space meant that overall rental expectations weakened during Q4, moving further into negative territory at –29%, which RICS says is the lowest reading since Q3 2009. Even in London, the headline rent expectations balance was negative. However, RICS says its report suggests that rents are still forecast to edge higher for prime office space in London.
Landlords tried to attract potential tenants with increased incentives during the final quarter of 2011. A total of 25% more respondents to the RICS survey reported rises in incentive packages than falls, which RICS says was the highest reading since Q4 2009. Inducements are rising in all market sectors, but most noticeably for retail premises, RICS says. It notes too that many potential occupiers are asking for reductions in rent and increased inducements in the current ‘difficult’ market.
There was a drop in investor enquiries during the final part of last year, which is likely to lead to a lower level of activity in the early part of 2012, RICS says. It adds that capital value expectations have also eased, with a more negative view of the prospects being taken in all three main market sectors.
RICS chief economist Simon Rubinsohn noted: “Confidence is key to a sustained recovery in the sector and this is going to be hard to bolster until the key issues surrounding the European sovereign debt crisis are resolved.”
