The cost-of-living crisis and interest rate hikes have caused a slowdown in the Scottish commercial property market and the outlook has therefore become more cautious.
This is according to the latest Royal Institution of Chartered Surveyors (RICS) Commercial Property Survey which showed that occupier demand across all sectors in Scotland has eased, with a net balance of +11% of respondents reporting an increase in the second quarter, compared to +33% in the previous quarter.
Retail continues to be in negative territory, with a net balance of -33%, while the net balances for office and industrial demand were lower than in the previous quarter, at +9% and +57% respectively in the second quarter, down from +32% and +74% in the first quarter.
Investor demand also eased according to respondents in Scotland. A net balance of +17% of respondents reported a rise in investment enquiries in the second quarter, compared to +29% in the first.
Respondents pointed to further falls in investment enquiries in the retail sector, with the net balance deteriorating from -13% to -32%.
Looking ahead, respondents expect both rents and capital values to rise in the next three months and the next 12 months, but they are less confident about both the short and longer-term outlook than they were in the first quarter.
Three-month rental expectations for both retail and office are now in negative territory (-29% and -4% respectively) while short-term rental expectations for the industrial sector are less positive than they were.
George Ranachan, director of Christe & Co in Glasgow, said: “I would assess the market as in the early stages of a downturn with the fourth quarter of 2022 likely to see the deepest fall.”
Gavin Russell, a senior surveyor at J&E Shepherd in Dundee, said: “The industrial market continues to outperform other sectors in terms of demand and rent and capital values. Demand for roadside and leisure developments in particular continues at pace.
“Secondary retail is performing fairly, despite economic pressures.”
RICS' economist Tarrant Parsons commented: “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 the second quarter,“ he continued, adding: “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.”
In response, RICS has released a 10-point plan aimed at supporting communities through delivery of local economic growth, as part of the UK Government’s levelling up strategy.
Phil Clark, chair of the RICS Commercial Property Forum, stated: “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.”
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