Commercial property market in downturn due to Brexit, says RICS survey

The commercial housing market is the early stages of a downturn due to Brexit uncertainty, according to the industry body for chartered surveyors.

The Royal Institution for Chartered Surveyors (RICS) found that investment demand fell sharply after the UK’s decision to leave the European Union on 24 June, especially in London.

The commercial market survey from RICS was conducted after the referendum between 24 June and 12 July, collating the immediate response to Brexit.

The survey found that there was a significant drop in confidence and investor demand following Brexit. Both the investment and occupier sides of the market were affected by the change in feeling.

RICS senior economist Jeff Matsu said: “Political and economic uncertainty in the aftermath of the referendum result has clearly dampened sentiment in the commercial property market, with the tone becoming visibly more cautious right across the UK. Although the impact is widespread, the drop in confidence has been most pronounced in London.”

The majority of respondents, about 36%, across the UK now feel the market is in an early down turn as the 12 month capital value and rental projections moved into negative territory.

All parts of the UK felt there was a downturn, but it was particularly pronounced in London where 54% agreed.

The survey said that during the second quarter of the year investment inquiries fell sharply by 16% across the country, following the initial increase of 25% in the first quarter.

Foreign investor demand declined at a faster rate at 27%. London again felt the steepest decline as investor enquiries fell to the lowest since 2009, as 41% of respondents saw a drop in commercial real estate demand.

Occupier demand also waned as it failed to rise for the first time since 2012. The net balance fell from +21% to zero in the second quarter.

About 7% said they expect rents to decline over the next quarter in comparison to the first quarter when 26% thought rents would rise.

Office and retail sectors also experienced a decline in rental projections, with both falling in negative territory. However, due to a lack of supply rent expectations remain positive for the industrial sector.

In London, rent is expected to fall around 3% over the next 12 months and secondary retail rents are expected to suffer the largest decline in the capital.

Although, RICS said a tight property supply, especially in the industrial sector, should provide a certain degree of support to rents and capital values for the short-term.

Matsu added that there is was uncertainty surrounding Brexit and it is uncleat whether the ill sentiment would be prolonged or not.

“Nevertheless, following several years of strong capital value and rental gains, momentum had already appeared to be slowing. Whether or not the sharp deterioration in the RICS survey data is a kneejerk reaction that will unwind as the result is digested, or the start of a more prolonged downturn, remains to be seen.”

RICS UK head of policy Jeremy Blackburn said there was a need for clarity after Brexit and what it means for the financial services industry, whether there would be access to the single market.

“In laying out what we will negotiate for, there is a need for clarity for the ability of financial services to do business in the UK which will affect demand for office space, especially in the City of London. Similarly access to the single market or potential tariff barriers will be key in the longer term for some industrial occupiers and exporters. And immigration plans could well affect the future supply of new commercial space onto the market through construction starts.”

Howard Archer, chief UK and European economist at IHS Global Insight said that overall the housing market is likely to weaken, but there are some factors that should help limit the downside for house prices.

“The Bank of England will highly likely cut interest rates from 0.50% to 0.25% in August to counter the downside risks facing the economy following the EU exit vote, although non-tracker mortgages may not come down much further if at all, and there is a heightened probability that interest rates will remain extremely low for a prolonged period.”

Archer also said the limited supply of houses, may have some limiting impact on the downside for house prices.

“The latest RICS survey reported that new instructions to sell fell for a third month running in June, having been flat in March. They have been largely falling since the start of 2015. Furthermore, June’s drop in new instruction was the sharpest since the series began in 1999.

“We suspect that house prices could fall back by up to 5% over the second half of 2016 and there could well be another 5-7% drop in 2017”.