UK commercial real estate entering downturn – RICS

People queue for food in the financial district of Canary Wharf, London, Britain, May 18, 2022. REUTERS/Kevin Coombs

LONDON, July 28 (Reuters) – Britain’s commercial real estate sector is entering or might already be in a downturn, according to an industry survey, as higher interest rates push up investors’ financing costs and weaker consumer sentiment hurts demand for retail space.

The Royal Institution of Chartered Surveyors (RICS) said on Thursday that 43% of respondents to its quarterly commercial property survey thought the sector was in the early stages of a downturn, and a further 10% thought it was in the middle of one.

By contrast, three months ago 53% said the sector was in the early or middle stages of an upturn, a proportion that has now slumped to 22%.

“The gloomier macro outlook appears to be dampening sentiment across the commercial real estate market,” RICS economist Tarrant Parsons said.

“Given interest rates are set to rise further from here, it appears the market may be at a turning point.”

British consumer price inflation hit a 40-year high of 9.4% in June, and financial markets expect the Bank of England next week to raise interest rates by half a percentage point to 1.75%, which would be the biggest rate rise since 1995.

Markets price in BoE rates hitting 3% by early 2023 and RICS said credit conditions for property investment were now tougher.

“This appears to have dampened momentum behind investor activity in particular, with headline capital value projections turning flat on the back of this,” it added.

Capital values were projected to fall outright for retail space, which is bearing the brunt of the cost-of-living squeeze. Demand for office space was levelling off – especially for second-tier locations – while the outlook for industrial sites such as warehouses remained strong, RICS said.

Reporting by David Milliken
Editing by William Schomberg

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