RICS commercial property survey predicts falling rents to continue

06 May 2009

Tenant demand across all sectors continued to fall in the first quarter although the pace of decline eased back according to the RICS Commercial Property Survey published this week. The decline in rentals is expected to accelerate on the back of a record increase in available floor space.

The net balance of surveyors reporting a rise in available floor space rose at the fastest pace in the survey’s history. 65 percent more Chartered Surveyors reported a rise than a fall in available floor space up from 57 percent in the last quarter. The ongoing contraction in the economy and the continuing rise in available floor space have weighed on surveyor expectations for the rental outlook. Surveyors are now more pessimistic than ever before with 80 percent of surveyors expecting a fall than a rise in rents. The value of inducements (a lead indicator of future rental trends) rose at the fastest pace in the survey’s history as landlords continued to try to boost demand with incentives.

Some 40 percent more Chartered Surveyors reported a fall than a rise in occupier demand compared to 71 percent in Q4 2008. All sectors remain firmly in negative territory for the sixth consecutive quarter but the pace of decline moderated from record lows. This improvement offers some hope that the dramatic easing in monetary policy and fiscal stimulus measures are providing some support to the commercial property market by lifting business confidence.

The immediate outlook for lettings activity remains poor as the net balance of surveyors reporting new occupier enquiries remained in negative territory. However 38 percent more Chartered Surveyors reported a fall than a rise in new enquires for business space compared to 63 percent in the last quarter – the least negative reading in a year. The improving enquiry trend was most pronounced in the south.

Commenting, Oliver Gilmartin, RICS senior economist said: “Whilst indicators have moved off historic lows, the reality is that fundamentals in the occupier market continue to deteriorate as companies remain in consolidation mode. Landlords are ramping up inducements as they attempt to secure a letting with sharply rising available space exerting greater downward pressure on rents. The investment market continues to see declines in transaction activity although at the slowest pace since the onset of the downturn. Whilst it is still too soon to point to an end in price falls, deal activity should be picking up by the end of the year as those with deep pockets move in. Given the gloomy backdrop for the sector and expectation of further rises in vacant space, RICS is disappointed that the government failed to address the issue of empty property rates in the recent budget. This is encouraging the demolition of perfectly good buildings, discouraging speculative development and could result in more far reaching problems when the economy starts to pick-up again."