The cost-of-living crisis and Bank of England rate hikes have caused a slowdown in the commercial property market in Wales and the outlook has therefore become more cautious, according to the Royal Institution of Chartered Surveyors (RICS) Commercial Property Survey.
Occupier demand for commercial property across all sectors in Wales eased, with a net balance of +10% of respondents reporting an increase in Q2 2022, compared to +35% in the previous quarter. Retail continues to be in negative territory with a net balance of -8%, while the net balances for office and industrial demand were lower than in the previous quarter, at +8% and +31% respectively in Q2, down from +45% and +71% in Q1.
Investor demand also eased back according to respondents in Wales. A net balance of +1% of respondents reported a rise in investment enquiries in Q2 compared to +34% in Q1. Respondents pointed to falls in investment enquiries in both the retail and office sectors and an easing in enquiries about industrial property. The net balance for investment enquiries for industrial space was +38% in Q2 compared to +64% in Q1.
Looking to the year ahead, respondents expect both rents and capital values to rise in the next 12 months, but they are less confident about the outlook than they were in Q1. The all-sector net balance for rental expectations eased from +32 to +19 and the all-sector net balance for capital value expectations eased from +31 to +22.
Tarrant Parsons, RICS Economist, said:
As the UK economy grapples against significant impediments to growth, the gloomier macro outlook appears to be dampening sentiment across the commercial real estate market. In particular, with the Bank of England sanctioning several interest rate hikes over recent months in an attempt to ward off inflation, respondents report that credit conditions are now tightening within the sector. This, in turn, appears to be weighing on investment activity, which lost some momentum at the headline level during Q2. Given interest rates are set to rise further from here, it appears the market may be at a turning point, with an increasing share of survey participants throughout the UK now feeling conditions are consistent with the early stages of a downturn.
Phil Clark MRICS, Chair of the RICS Commercial Property Forum added:
This week, RICS have released a ten-point levelling up plan aimed at supporting communities through delivery of local economic growth, as part of the UK Government’s levelling up strategy. These new investment figures underline the challenges in attracting investment in an uncertain economic environment. It is vital that the UK Government and private sector work together to attract investment and meet the challenge of sustainable placemaking in the built environment, supporting economic regeneration and providing jobs, and easing economic pressure on people across the UK. RICS is committed to working to support delivering this with the UK Government.
Richard Ryan from Fletcher Morgan in Cardiff said:
There appears to be a disconnect between demand from buyers looking to invest, compared to occupational demand and the prospects for future rental growth. The weight of money amassed by investors during the pandemic combined with the lack of transactional activity, together with the current high rate of inflation, is continuing to drive down investment yields. This is unlikely to be sustainable unless there is a significant improvement in occupational demand which requires economic growth.