UK commercial real estate as depressed as the economy

LONDON | The retail property market in the UK continues to struggle, as demand for retail premises stuttered again in the first three months of 2012. This lack of interest in the sector combined with growing availability resulted in a further drop in rental expectations, the latest RICS UK Commercial Market Survey showed on Tuesday.

Interest from potential tenants of retail space continued to fall in the first quarter of the year as a net balance of 11 percent more respondents reported reduced demand. This was mirrored by increasing availability of unoccupied floor space (net balance +17).

As a result, rental expectations for the retail sector were firmly negative with 28 percent more surveyors predicting falls rather than rises in rental values over the coming three months. Significantly, every region in the UK reported negative readings for rental predictions.

Simon Rubinsohn, RICS chief economist, said that the retail property sector continued to suffer and doubted that the government’s response, announced last week, could have a game-changing impact on the high street and the retail sector as a whole. The lack of credit remains at the core of the problem.

“Across many parts of the country, it seems that the commercial property sector in general is continuing to struggle, with a lack of affordable finance proving a big barrier to growth.”

Overall, there was little change in activity levels across the whole of the commercial property sector, with demand for floor space stabilising in the early part of the year after falling through the latter part of 2011. Surveyors report that problems obtaining affordable finance as well as uncertainty over the economic outlook are holding back potential occupiers.

With interest from prospective tenants remaining flat, new developments starts were once again in negative territory during the early part of the year (net balance -7). This has been the case in every single quarter since the onset of the credit crunch in the middle of 2007. Notably, surveyors in all regions of the country reported falling development levels, too.

Elsewhere, general availability of commercial space remained flat during the first quarter of the year, as a net balance of four percent more surveyors reported increases rather than decreases in available floor space. This represents the lowest reading since the final quarter of 2010 and reflects, in part, the fact that the trend in new developments has been weakening for so long.

Looking ahead, with general activity remaining subdued, overall rental expectations were once again downbeat as 14 percent more respondents predict rents to fall rather than rise over the coming three months.

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