Resilient economy drives firm real estate outlook

Tenant demand for commercial property rose, across all sectors, for the seventh consecutive quarter according to the latest RICS UK Commercial Market Survey, with 40% more surveyors also reporting greater investment interest.

In the occupier market, expectations remain generally buoyant. Across the whole of the UK, a third (33%) more respondents expect commercial rents to increase. This is consistent with the strength of the economy and robust demand for space, as well as declining availability which is, in part, linked to Permitted Development Rights. Office and industrial rent expectations remain a little firmer than those for retail, which has been slower to benefit from the turnaround in sentiment.

The combined effect of low levels of new development and a sustained period of rising investment demand, has produced the highest reading for capital value expectations (over the next three months) since 2008 with 46% more surveyors expecting prices to increase over this period.

In London, both rents and capital values are still anticipated to rise at a materially faster pace than other parts of the country, during the next quarter, with the regional divergence most pronounced in the retail sector. However, in a clear sign of a broadening out of the recovery in real estate, investment enquiries are now rising in most sectors across most parts of the country.

Meanwhile on the political landscape, a slight majority of 47% believe that the run up to the general election will not induce a slowdown in speculative commercial development, compared with 40% who thought otherwise. In addition, around one in six surveyors believe talk of a potential British exit from Europe is already impacting investment decisions.

Simon Rubinsohn, Chief Economist said:

“The Q4 results highlight a continued strengthening on both the occupier and investment sides of the UK commercial real estate market. Looking forward, domestic economic conditions are set to remain relatively favourable, with 2015 expected to bring another year of solid GDP growth and further improvement in labour market conditions. Moreover, the recent disinflationary pressure is likely to mean interest rates stay on hold for the best part of the year, providing further support to the market. However, uncertainty over the upcoming general election is a potential risk to activity and global challenges should not be overlooked.

“Despite the compression of yields in key prime markets, the results from the survey suggest that investors believe there is more to go for with expectations particularly firm in central London retail and office sectors.”

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