Much of the London retail sector is under pressure, as contributors expect occupier demand to fall further, according to the London results of the Q2 2018 RICS Commercial Property Market survey.
The quarterly survey results are showing that the downturn across the capital’s retail sector continues in contrast with the industrial sector, which is attracting demand from occupiers and investors.
Looking at demand from occupiers, London contributors noted a decline at the headline level in Q2, giving the weakest reading since 2012 (-19%). Breaking this down, the retail sector reported the weakest reading, with 68% more respondents noting a fall in demand, in the capital, over the quarter. Office demand remained flat while tenant enquiries continued to rise in the industrial sector, and have now increased in twenty-three successive quarters, in London.
This pattern is also reflected in the availability of space with empty retail units becoming increasingly visible but a lack of good quality industrial/logistic opportunities. Indeed, availability of industrial space in London declined once again over the quarter extending this overall trend back six years. Development starts in this segment of the market remained flat in London.
Given the demand supply picture, it is unsurprising that rents are predicted to increase for both London prime, and to a lesser degree, secondary industrial space, for the year ahead. By way of contrast, although the pressure is most intense on secondary retail, the prime retail rent indicator has been in negative territory for three consecutive quarters. Prime London office rents are also expected to show modest gains however secondary office rents are anticipated to continue to drop.
The London investor market to a large extent mirrors the patterns in the occupier market. The headline number for enquiries has dipped further, industrials are still attracting some interest while retail is increasingly out of favour. The trend in capital values for the year ahead will follow this with secondary retail most vulnerable and prime industrial predicted to show the strongest gains.
In an additional set of questions included in the latest survey, just over one-third of respondents across the UK reported seeing an increase in the usage of Company Voluntary Arrangements (CVAs) over the past year, with around two-thirds anticipating that this will lead to more retailers inserting CVA clauses into contracts going forward. As such, it is unsurprising that over 70% of contributor’s sense investors will be looking to scale back exposure to the sector.
Simon Rubinsohn, RICS Chief Economist commented: “The challenges being faced by retail not surprisingly come through strongly in the latest set of results, but the counterpoint to this is the ongoing strength of demand for good quality, well located industrial/logistic sites. Indeed, the lack of availability of stock in the industrial segment of the market and the generally sluggish development pipeline, is pointing towards further healthy gains in pricing”.
Andrew Barnes from JLL, London said: “London’s position as Europe’s tech capital has ensured continued healthy market conditions, the top end of the West End market has softened slightly and there is still pressure for more lease flexibility, but the outlook remains very positive. Need more development starts as a definite shortage of space in 2021-2022 is projected and demand supports it.”
Barry K Bhalla MRICS, from Acrewoods Chartered Surveyors, London said: “Demand for good secondary retail increasing, whilst demand is falling for prime retail. Uncertainty about Brexit is having a downward effect on investor and occupier confidence.”
Charles McClean from C J McClean Associates Ltd, Westminster, said: “Office occupier demand remaining “patchy”, and for the first time, I am starting to see the effect of the serviced sector, with occupiers prepared to pay more for flexibility, reflecting their nervousness.”