Demand for UK commercial property subdued over last three months

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The UK commercial property sector has on the whole been performing relatively well of late although the second quarter of 2017 saw demand hit a five-year low. The Royal Institute of Chartered Surveyors (RICS) demand index fell to -2 for the second quarter of 2017 which is the lowest level since the third quarter of 2012. There are obvious issues such as the economy and Brexit and in reality the sector has perhaps performed better than many had expected over the last few years.

Realistic trend

It is no real surprises to see the demand for commercial property across the UK begin to flatten out. In many ways this is a reality check for not only the commercial sector but also the property sector as a whole. The recent sale of the Walkie Talkie building for a record £1.28 billion on a yield of 3.4% and the earlier sale of the so-called Cheesegrater on a yield of 3.45% are probably exceptions to the rule because of their stature and reputation.

Banking sector

Slowly but surely many banks which have historically had headquarters in London are moving some of their staff to countries such as Ireland in light of the Brexit negotiations. This is having an impact upon demand for commercial property across London although this pattern is also being replicated to a lesser extent and for different reasons across the UK. It will be interesting to see how the UK government attempts to “save” the UK banking sector with more and more companies talking of moving head offices and specific operations to within the European Union.

We are talking potentially tens of thousands of jobs moving in due course but it is easy to forget that London was a global financial giant before the European Union and it will remain so afterwards.

Retail sector

The retail property sector is being hit by a double whammy with consumer spending under pressure and online operations continuing to grab market share. A perfect example of this growing problem was the 3% fall in employment numbers across the UK retail sector over the last 12 months compared to an increase in jobs across the whole economy of 1%. On the flipside, the expansion of online retail operations has led to an increase in demand for warehouse and other storage facilities but this does not make up for the carnage on the UK high street.

The short to medium term outlook for the UK economy is difficult to say the least with growth in the first quarter of 2017 coming in at 0.2% and 0.3% for the second quarter. Amid all the confusion and concern about politics and Brexit the UK economy will do well to remain positive during this extended transitional period. What impact this will have on the retail sector and the commercial property industry remain to be seen.

Conclusion

The UK commercial property sector has performed well over the last few years so the recent dip was perhaps expected. While there are challenges in the short to medium term, the economy, politics and Brexit, there is still underlying demand from domestic investors and increased demand from foreign investors who have seen their relative spending power increased with the fall in sterling.

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