A "rising share" of RICS members believe UK market conditions are stabilising or beginning to improve despite the persistence of higher borrowing costs and the slow economic growth outlook, the institution's quarterly commercial property survey finds.
Although RICS predicted the market would remain "subdued" for the forseeable future in its UK Commercial Property Monitor Q1 2023 report, it said "the overall tone is not as downbeat as last quarter", with the industrial sector experiencing "renewed momentum".
RICS senior economist Tarrant Parsons said in a statement: “Although the picture across the UK commercial property market remains generally subdued in the face of higher interest rates and a soft economic outlook, the latest survey feedback tentatively suggests that the most difficult period for the market may now have passed.
“Capital value expectations for industrial assets returned to modestly positive territory, having fallen sharply at the end of last year. This improvement has been supported by still solid occupier conditions across the sector, with demand for industrial space continuing to outstrip supply.
“Likewise, many of the more alternative sectors, such as aged care facilities, life sciences, data centres and student housing display a resilient outlook for the year ahead. By way of contrast, secondary office and retail properties continue to struggle, evidenced by rental and capital value projections remaining deeply negative, across both segments for the coming twelve months."
The headline net balance for expectations around tenant demand was minus 3% in the first three months of the year, a positive improvement on minus 20% in the final quarter 2022. Industrial was one of the better performing sectors as it enjoyed a pick-up for occupier demand, registering a net balance of 16%, compared with 6% in last year's final quarter.
RICS found tenant demand was "flat to marginally negative" for office space, with a net balance of minus 6%, and continued to fall across the retail sector, which came in at a net balance minus 23%. This was less negative than in the previous quarter, while respondents were more positive about prime offices.
The report said the net balance of respondents predicting an increase in prime industrial rents over the next twelve months rose from 40% in Q4 2022 to 58% in the first quarter of this year, and from 6% to 23% for secondary industrial rents.
There remains, however, a stark contrast between prime and secondary offices, with best-in-class assets expected to see solid rental gains (net balance 29%). Rents were seen falling across the latter (net balance minus 37%). One London agent said central London prime office rentals "continue to fly", but said it was a "different story" completely for secondary assets.
Anecdotal remarks continue to cite ESG factors as an important driver of demand for some offices. Another agent said: "Business office occupiers are working smarter and more efficiently than ever. Demand for office space will always exist due to lease events and changes in working practices. Demand from occupiers is for new build offices or offices with excellent environmental credentials."
A net balance of 38% of respondents predicted prime office rents in London would rise in the year to come, while increases across the South, Midlands and the North were also predicted, but with less certainty.
The quarterly report also found industrial rental growth expectations "are particularly buoyant across the Midlands". Both prime and secondary retail rents are projected to fall across most parts of the UK, but it is a different story for prime London retail rents which are anticipated "to pick up marginally".
Investor demand posted a net balance of minus 14% in Q1 2023, which was less downcast than the reading of minus 30% seen in Q4 2022 but still indicative of weakening investor enquiries, the analysis said. Indicators tracking overseas investment demand remained in negative territory across all three traditional market sectors.
RICS said: "Expectations turned from negative to slightly positive in both the prime and secondary portions of the industrial market. Across the prime office sector, values are now seen holding steady over the year ahead (net balance 6% vs minus 31% in Q4 2022), although expectations remain deeply negative for secondary office values (net balance minus 44% compared to minus 65% previously)."