The divide in the commercial property market between retail property and the industrial sector is growing in the South East, according to the Q1 2018 RICS UK Commercial Property Market survey.
The weakness in retail appears to be spreading across prime locations, with a challenging backdrop being reported across the whole of the UK.
While occupier demand across all property areas declined this quarter, the sector breakdown shows demand for industrial space still rising, with 15% of respondents noting an increase. This contrasts sharply with retail, in which demand not only declined further but at an accelerating rate. A net 50% of respondents saw a fall in demand for retail property, which is the weakest reading since Q4 2008.
As regional demand for retail property dropped, availability in the sector rose significantly in Q1, with 36% more respondents noting an increase in availability. Retail landlords also raised the value of incentive packages to entice clients for a fourth consecutive quarter. This was in contrast to a decline in the availability of industrial space.
Looking at the South East rent growth expectations over the next three months, the same split was visible with contributors expecting to see downward pressure on retail rents growing, alongside rising near term rent predictions in the industrial sector. The negativity across retail was pulling down the headline average for rent growth expectations, with 5% more respondents predicting a fall rather than a rise over the next three months, the lowest since Q2 2016.
Looking at the sector in more detail, secondary retail rents are projected to decline across the region over the coming year, while the outlook is patchy at best for prime retail sites. Both prime and secondary industrial markets continue to display stronger rental projections over the year than all other sectors.
On a 12-month view, 34% more respondents in the South East predicted a fall in prime retail rents. The outlook for prime office rents appeared comfortably positive, although expectations remained flat for secondary.
Turning to trends in the South East investment market, headline enquiries rose for a fourth successive report, with investor demand increasing strongly for industrial assets, but flattening out for offices and retail. Interest from foreign buyers, meanwhile, was flat across all sectors during Q1. The supply of property for investment purposes continued to decline in the industrial and office sectors. Retail again bucked the trend, with supply increasing.