Rouzbeh Pirouz on Commercial property in the UK continues to bounce back

Rouzbeh Pirouz is Co-Founder and Senior Partner at London-based Pelican Partners, a real estate and private equity investment firm.

Confidence is returning in droves for commercial property in the UK. While restrictions didn’t lift until July, the increased optimism for the market sector was already apparent during the second quarter of the year.

According to the RICS UK Commercial Property Survey Q2 2021 results, more than half of respondents (56%) say that the market is growing and recovering well.

Investor interest is growing in commercial property in the UK
This is backed up by investor interest in commercial property in the UK, with more than 15% of contributors reporting an uptick in enquiries for the
commercial market during the quarter.

It’s no surprise that the industrial subsector continues to be of most interest to investors, with a net balance increase of 64%. This is the strongest subsector on record, with the demand for offices also on the rise. In Q1 2021, the office sector investment was at -18%, but by the next quarter had risen to 4%.

And, with media sources reporting that people are returning to offices in droves and that business owners are not going to be sticking with remote working permanently, this is likely to stabilise.

During the height of lockdown, we saw much media and industry discussion about whether the physical office has had its day. With so many corporate sectors successfully working remotely for months on end, it did seem as if this could be the case. However, industry leaders are now demanding staff return to their commute and the office, except for civil service staff at present.

I think that, rather than the ‘new normal’ of long-term remote and flexible work patterns once predicted, it now looks more likely that we’ll return to pre-pandemic levels of in-office attendance. And while this may not be the news every worker wants to hear, it is better for the commercial property sector and investors.

Occupier demand is also soaring across the sector
Across every commercial property sector, demand from occupiers is soaring – it’s at its highest since 2016, according to the report. We’re starting to see demand trends stabilise across the board, particularly for office space.

The biggest increase in demand for office space is for prime space, which gives further credence to the supposition that company bosses and industry leaders want people back in the office permanently.

Regionally, the South of England records the highest demand for office space, up to 7% in the second quarter. In London, the net balance for occupier demand is flat at -3%, which sounds less optimistic until you see that its net balance in Q4 2020 was at -79%.

Again, industrial space is leading in terms of occupier demand and investor interest. And for retail, there is a far less negative outlook. Just -25% of respondents reported a decrease in demand during Q2 2021, up a decent amount from the -55% reported in the year’s first quarter.

Industrial space is at a premium
Naturally, the increase in demand is putting pressure on supply. The availability of space across commercial property sectors mirrors the occupier and investor demand ratios.

Within the industrial, commercial property sector, there is still a low level of availability. The pandemic and the changing demands of consumers have had an impact, but this is the eighth year in a row that respondents have said that there is a lack of available industrial, commercial space in the UK.

There is, however, plenty of available and leasable retail and office space due to the difficulties of the last 18 months. However, there is a definite shift, and the rise in vacancies is finally slowing. Respondents also report an increase in incentives on offer to encourage occupiers to take up space.

If we turn to rents, we can see that prime industrial should rise by 5% over the next 12 months. Secondary industrial rents are also expected to rise over the next 12 months, albeit at a slightly lower rate of 3%.

And of course, demand for prime office space is rising once again, but it is still predicted to fall over the next 12 months, if only by 1%, with secondary office rents set to drop by 4%.

For retail, rents will inevitably continue to fall. Current projections have rents for prime retail space decreasing by 5.5% and 8% for secondary retail.

Capital value growth is broadly unchanged
For the next 12 months, the growth in capital value across commercial property in the UK is mostly unchanged. Respondents expect values to rise away from traditional mainstream markets instead of turning to areas like data centres and care homes.

Student housing has regained its status somewhat and is now neutral, while hotels and accommodation for holidays are only slightly negative at -1%.

More than half of the respondents to the survey in Q2 2021 are now confident that full recovery is on its way, compared with 38% in the first quarter. Demand trends are stabilising, particularly in the office subsector compared with recent months, and the industry continues to grow in demand for investors and occupiers alike.

It appears that the profoundly negative sentiment that has been attached mainly to the prime office market in London is now stabilising too. Growth in rental amounts is expected, and while it’s not sharp, it is significant given recent times. In Scotland, the Northeast, East Anglia and the West Midlands, prime offices are expected to remain flat.

So, for commercial property investors, it’s time to look ahead to the long-term prospects likely to be available within this sector over the next 12 months and beyond.

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