Demand for London office and retail space continues to fall and “Brexit has been a factor”

Demand for offices and retail space in London continued to fall during the first quarter of the year, according to the Q1 2019 RICS UK Commercial Property Market Survey. Alongside this, anecdotal evidence suggests uncertainty over Brexit continues to deter investors and occupiers across the board.

London’s retail sector continued to struggle during the first quarter of the year, with 65% more commercial surveyors in the region reporting a decline rather than rise in demand from occupiers for retail space.

Meanwhile 6% more respondents reported a fall in demand for office space, and 15% saw an increase (rather than decrease) in demand for industrial property in the region. As demand for industrial space rose, the number of vacant units continued to decrease. Availability rose sharply in retail, however, with 56% more respondents in London reporting a rise rather than fall in vacant retail units during Q1 2019 (up from a net balance of 46% in Q4 2018).

Inducement packages from retail and office landlords picked up during the last quarter of the year in London as demand fell, along with a surprising 4% more respondents seeing a rise in industrial inducements during Q1 2019. 57% more respondents in London saw a rise in retail inducements (rather than a fall) whilst 38% more saw a rise in incentives to take-up office space.

Over the next 12 months, contributors in the capital are anticipating growth in rents across prime industrial property (47% net balance) and secondary industrial (net balance 18%). While for offices, 29% more respondents expect to see a rise in rents for prime Grade A office space over the coming year, with 20% more expecting to see rents fall rather than rise – over the same time period – for secondary office space. In contrast, rents for prime and secondary retail space are expected to continue to fall over the next 12 months.

This pattern of positive rental growth expectations for industrial and negative views for retail is replicated across all parts of the UK. The office sector is more nuanced, although prime office rents are seen rising across the majority of regions.

As the Brexit debate rumbles on, domestic investment enquiries for commercial property in London declined during the last quarter of the year. Retail was responsible for most of this decline with 57% more respondents predicting a fall in enquiries rather than a rise, followed by offices and industrial premises. 

Overseas investment demand declined across each area of the market during Q1 2019, as 33% of respondents said they had seen evidence of firms looking to relocate some part of their business as a result of Brexit. Going forward, a slim majority (53%) of respondents nationally do now expect relocations to occur.

Andrew Christie of ACA Surveyors in London said: “Uncertainty is caused mainly by the political climate being so unstable and unsure. Brexit has been a factor in this but the Government’s handling of the Brexit situation, together with inflated taxes on property including stamp duty, is a far bigger factor in the decline of commercial and retail property.”

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