Commercial property holdings to fall

04 November 2008

Two property surveys from RICS and CBI/GVA Grimley report a fall in demand for commercial property and a reduction in property holdings. Some 24% of firms plan to reduce their property space particularly in retail, financial services, manufacturing and leisure sectors.

The RICS’ Commercial Property Survey published 3 November 2008, says that the balance of surveyors reporting demand for commercial property in Q3 has fallen at the fastest pace in a decade, says 52 percent more Chartered Surveyors reported a fall than a rise in demand compared to 50 percent in Q2 2008. All sectors remain firmly in negative territory for the fourth consecutive quarter with the industrial and office sectors dropping to the lowest balance in the survey’s history. The worst hit area continues to be the retail sector with 59 percent more Chartered Surveyors reporting a fall than a rise in retail demand, a slight improvement from 63 percent in Q1. The continuing financial turmoil and a slowing housing market is clearly weighing upon both retailer and consumer confidence.

The net balance of surveyors reporting new occupier enquiries in Q3 declined at the fastest pace in the survey’s history. Financial uncertainty has impacted upon decision making in the business community with many re-evaluating their demand for commercial property space. 54 percent more Chartered Surveyors reported a fall than a rise in new enquires for business space compared to 53 percent in Q2.

The supply side of the market is still loose with all three sectors feeling the depressing effects of the continuing climate of financial uncertainty. The amount of available floor space increased at the fastest pace in the survey’s history with the retail sector leading the way. 33 percent more Chartered Surveyors reported a rise in available floor space compared to 27 percent in Q2.

The value of inducements rose at the fastest pace in the survey’s history (a lead indicator of falling rents) as landlords tried to counter falling demand with incentives. In fact, confidence towards the rental outlook fell to the lowest level since the survey began in 1998 with the greatest pessimism in Central London. Meanwhile, confidence in activity is close to record lows and going into the Christmas trading period the retail sector is expected to be the worst performer.

Commenting, Oliver Gilmartin, RICS senior economist said:

“The ongoing drag from the credit crunch is permeating through rental sentiment across all regions and sectors, especially in the Central London Office market where recent worry over the health of the hedge fund industry is only adding to the sense of pessimism. The intensification in credit strains following the collapse of Lehman brothers will undoubtedly further dampen investment and occupier demand heading into the fourth quarter.

“The opening of the Westfield shopping centre in Shepherd’s Bush arrives at a time when retailers are bracing themselves for what could be a torrid Christmas trading period, with retail lettings activity expected to suffer in the coming quarter.”

CBI/GVA Grimley Corporate Real Estate Survey reveals published 30 November reports that fewer firms expanded their property portfolios over the last six months, and firms are planning to reduce their property holdings in the coming half year, the latest

The twice-yearly survey, conducted between 27 August and 17 September 2008, reveals a balance of +3% said they had increased their property holdings in the last six months, a slower rate of growth than the previous survey (+15%) and below expectations (+7%).

In the next six months, a balance of 24% of firms plan to reduce their property space. Retail, financial services, manufacturing and leisure are the sectors showing the biggest change in direction. Retailers reported that their property holdings increased in the past six months but they expect little change in the next. Very modest growth in property holdings by the leisure sector is expected to be followed by a sharp contraction over the coming half year, and falls in financial services and manufacturing are expected to intensify.

Firms were asked about the impact of the credit squeeze and the slowing economy and around 80% reported each was having an effect on their business. In the last survey, the impact from the credit squeeze was still contained largely to the financial services sector. Nevertheless, firms said even then that key effects of the credit squeeze were to be seen in impacts on property disposal and acquisition.
In the current survey, half of firms say surplus property is an issue. Around 50% of respondents have surplus property, with retail (66%), extraction, chemicals & utilities (90%), manufacturing (61%) and the leisure sector (64%) carrying a material amount.

Howard Cooke, Director at property consultants GVA Grimley said: "The trend of more firms planning to reduce their property holdings is accelerating, with a significant fall in demand expected over the coming six months. "Most firms are now feeling at least some effect from the tighter lending conditions and the economic slowdown. Falling business activity and lower demand is likely to increase the property surpluses, which will only push up the cost of paying empty property rates."

Forty per cent of firms in the survey say they have vacant surplus property. Since the reduction of empty property rate relief as of April this year, occupiers must pay full business rates on property after a very short period. Half of the survey respondents said paying vacant rates was having an effect on their business, with transport and engineering firms the most affected.

Over a fifth (21%) of businesses said they were demolishing empty property or were considering doing so, another fifth (21%) were either being forced to or are considering reoccupying vacant space and two-fifths (38%) were speeding up the surrender of their leases to landlords.

Karen Dee, the CBI’s Head of Infrastructure said: "Businesses are paying a billion pounds a year more due to the government’s changes to empty property rate relief. Companies are facing up to a recession and need to reduce costs, so this could not have come at a worse time. "The government should look at everything it can do to help businesses through these difficult times and reversing its recent decision on empty rate relief would be one good way of doing so."