In its recent ‘State of the Nation’ survey looking at the health of the UK property market, Q3 2018 RICS UK Commercial Property Market Survey, the B-word continues to cast a long shadow.
When posed the question: Have you seen any evidence of firms looking to relocate away from the UK in response to the Brexit vote? Around 25% of respondents said no. But when asked if they expect to see firms relocating away from the UK over the next two years, almost 50% said yes.
What effect might this have on the long-term health on the commercial mortgages market? Ever since that seismic vote in 2016 to take us out of the EU, RICS has asked its survey respondents each quarter if they have seen any evidence of firms looking to relocate at least a portion of their business as a result of the vote. The proportion seeing some activity has consistently hovered at around 15% to 18%. In the latest RICS results, this has leapt to a quarter of respondents. It’s hard to say whether this represents a firm statement of intent or mere mood music regarding the end game of the negotiation process.
Despite these indicators, commercial properties continue to be a good bet. Mortgage brokers and lenders are increasingly seeing investors moving away from traditional ‘vanilla’ properties and looking at more complex buy-to-let: rents on commercial lets tend to be higher, offering a better yield for landlords when margins get squeezed. Since 2000 the UK’s commercial property stock has grown on average by 3% year-on-year according to the Property Data Report.
With semi-commercial properties there are clear market benefits notwithstanding stamp duty exemptions even though these properties will have a residential and commercial element.
The UK commercial property market in 2016 was worth £833billion, representing 10% of the UK’s net wealth. Investors owned £486billion worth of non-residential property in the UK with overseas investors owning just under 30%.
Nonetheless, some areas are more buoyant than others. This is exemplified in the commercial sector’s Holy Trinity of industrial, office and retail space. The Q3 RICS Survey showed demand for industrial space, a steady run of uninterrupted growth stretching back to 2012. The demand for industrial space is benefitting from the shift towards online shopping. The demand for office space was unchanged, however, retail space demand from businesses saw another fall for the sixth successive quarter.
Nationally, the retail sector is displaying challenging rental projections across the UK with a projected downward trend for both prime (good transport links and close to amenities) and secondary (within walking distance to transport links and amenities) locations. The London market for secondary office space is expecting to see a slight fall in rents. The outlook for prime office rents in the capital is looking relatively flat but regionally the picture looks more positive. Prime industrial values are rising confidently throughout the UK. Secondary industrial prices appear strongest in the Midlands and the South of England. Prime industrial, secondary industrial and prime office remain strong performers, however, prime and secondary retail have a definite downward trend. It is hard to say what effect increased pressure Brexit will have on our high street.
The panel of chartered surveyors interviewed for the RICS survey provide a mixed picture. Some areas such as East Anglia are showing market resilience despite uncertainty over Brexit negotiations whereas in the North East and North West businesses are taking a more wait-and-see approach and Scotland experiencing a slowdown in the property market.
To sum up, commercial property is still looking like a good investment option with high yields with both prime and secondary industrial office space showing excellent growth potential. Commercial property has faced down economic and political uncertainty in the past so there’s nothing to suggest it won’t be able to maintain its competitive edge from March 2019 and beyond.