Occupier demand in the commercial property market in Wales fell through Q2 2023, according to the latest Royal Institution of Chartered Surveyors (RICS) Commercial Property Monitor, and surveyors remain cautious whilst the industry continues to face a challenging environment.
A net balance of -19% of respondents in Wales said that occupier demand fell in Q2 2023, broadly in line with the figures seen in Q1. There was a reported increase in demand in the industrial sector, with a net balance of 25% of respondents seeing a rise, and demand for both office and retail space remained in negative territory at -31% and -50% respectively.
On the investor side, a net balance of -29% of surveyors reported an overall fall in investor enquiries. A net balance of -50% of respondents saw a fall in office space, -38% in retail space, and industrial space was recorded as broadly flat.
On the outlook, overall capital values are expected to fall further, with a negative outlook for the three months ahead. A net balance of -30% of respondents in Wales indicated that they expect net capital values to fall across all sectors over the second quarter of 2023, with all three subsectors anticipated to see declines.
Regarding rental expectations, a net balance of -24% of respondents expect a fall in rents over the next three months. Both office rents and retail rents are expected to fall with a net balance of -38% and -50% expecting a decline respectively. Looking at industrial, a net balance of +17% of respondents expects rents in the sector to rise.
Chris Sutton MRICS, of Sutton Consulting LTD commented:
The commercial property market in Wales is battling the headwinds of increased interest rates and caution from those occupiers considering future workspace requirements. However, the prime industrial sector continues to perform strongly with St Modwen’s large speculative scheme in Newport securing record headline rents of over £8 per sq ft. The office market continues to adapt to changing working patterns with in-town more buoyant than out of town. Healthy demand for smaller Grade A suites in Cardiff city centre is the high point of an office market where the broader challenge will come from the need to repurpose larger secondary office buildings to alternative uses.”
Commenting on the UK picture, Tarrant Parsons, Senior Economist at RICS, said:
“The stubbornness of UK inflation over recent months has once again shifted the outlook for monetary policy, with further interest rate hikes from the Bank of England now priced-in across financial markets. This has, almost inevitably, impacted sentiment within the commercial property market, as higher borrowing costs weigh on investor demand and place renewed pressure on capital values. Meanwhile, occupier activity, although also losing some momentum in Q2, appears a little more resilient at present. As such, this is reflected in still positive rental growth expectations for the year ahead across the industrial sector, prime offices, and for several of the more alternative asset classes tracked in the survey.
“This week’s UK Government announcement on loosening regulations surrounding the conversion of certain types of commercial property into residential use could encourage investment opportunities. If carried out to a suitable standard, these types of conversions have the potential to reduce the overhang of vacant retail space and provide much needed housing in central locations. However, while these measures could prove beneficial at the margins, given the scale of the challenges around housing supply and unused retail premises, they are unlikely (on their own) to be sufficient to fix the deeper market issues.”
