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UK Commercial Property Sector "relatively downbeat" - RICS Q3 Report

Commercial property market remains subdued, says market monitor

The Royal Institution of Chartered Surveyors (RICS) has released its Q3 market monitor report, revealing that the UK commercial property sector continues to face challenges, with activity described as "relatively downbeat." The report attributes this subdued performance to tighter financial conditions and a sluggish economic environment, affecting both investors and occupiers.

Key findings from the report include:

Occupier Demand: The headline occupier demand indicator registered a net balance reading of -12% in Q3, a slight decrease compared to the -10% reported in the previous quarter. This indicates a modest overall decline in occupier demand. Notably, both the office and retail sectors showed negative trends in tenant demand, with respective net balances of -19% and -25%. The industrial sector also displayed slowed demand growth, with a net balance of +3%, the softest reading since Q2 2020.

Corporate Cash Flows: Over 75% of contributors to the report anticipate increasing pressure on corporate cash flows over the next year, reflecting the challenging economic landscape.

Rents and Capital Values: The outlook for overall rents and capital values remains "slightly negative." However, there is somewhat more positive performance expected in prime markets and some alternative sectors.

Availability: Respondents noted an increase in overall vacant space in the office and retail sectors, leading to the continued use of incentive packages, such as rent-free periods.

Investor Demand: Investor demand trends remain subdued, with overall investment enquiries posting a net balance of -21%. This marks the fifth consecutive quarter with negative territory. For specific sectors, while the industrial sector displayed a generally flat picture for investment enquiries (net balance of zero), the office and retail sectors reported negative balances of -33% and -35%, respectively. Twelve-month capital value projections remain negative across most traditional market segments.

RICS Senior Economist, Tarrant Parsons, commented on the findings, stating, "The UK commercial property market continues to feel the effects of higher interest rates, above-target inflation, and weak economic growth prospects. Investment activity remains subdued, while occupier market trends are also softening. This trend is seen across the UK, with secondary office and retail premises facing the brunt of the downturn, influenced by both structural and cyclical dynamics."

On a more positive note, prime offices continue to outperform the secondary market, benefiting from a "flight to quality" post-pandemic and increased attention to energy efficiency standards. Similarly, the industrial sector is showing more resilience compared to other traditional sectors, although the overall picture is less robust than in recent years.

The Q3 report underscores the challenges faced by the UK commercial property sector as it navigates economic headwinds and changing market dynamics.


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