Demand for commercial property in Northern Ireland has fallen at its sharpest rate since mid-2021, according to the latest Royal Institution of Chartered Surveyors (RICS) Commercial Property Monitor but the outlook for the industrial sector remains strong, as it continues to outperform both retail and office space.
At all-sector level, a net balance of -15% of surveyors in Northern Ireland reported that occupier demand had fallen. This is the lowest this balance has been since Q2 2021. Looking at the subsectors, both office (-33%) and retail space (-13%) remained in negative territory, however some of the pressures on the retail sector seemed to have eased as this is the least negative this balance has been since the end of 2021. The industrial sector was reported to have fallen flat through Q2.
In regard to investor demand, this balance remained the same for the second consecutive quarter with a net balance of -12% of NI surveyors reporting a fall in investment enquiries. Investment enquiries for industrial space were reported to have risen through Q2 with a net balance of 11% of surveyors reporting an increase. Demand from investors for both office and retail space fell according to the results of the survey, with net balances of -22% and -25% of respondents reporting declines respectively.
On rental expectations, a net balance of -12% of surveyors in NI expect rents to fall over the next three months. There is an anticipated fall in rents for both office (a net balance of -22%) and retail (a net balance of -25%) space. Rental prices are expected to increase in the industrial sector with a net balance of 11% anticipating a rise, however this is at a slower rate than the 27% than was seen in Q1.
A net balance of -4% of NI respondents anticipate that capital values will fall over the next three months and although remaining in negative territory, this is the highest this balance has been since the pandemic. A net balance of 22% of NI respondents expect a rise in capital values in industrial space, up from 18%. Capital values for both office and retail space are expected to decline, but at a lesser rate. A net balance of -22% expect a fall in office space, up from -45%, and a net balance of -13% anticipate a fall in retail, up from -18%.
On the 12-month horizon, a net balance of -8% of NI surveyors anticipate that capital values will fall over the next year, up from -17% in Q1 and the highest this balance has been since Q1 2022.
Garrett O’Hare, RICS NI commercial property spokesperson and Managing Director of Bradley NI says: “With inflation having cooled, Stormont back up and running, and a new UK government in place, there is a quiet sense of optimism in the market despite the continued challenges of increased cost of raw materials, planning delays and infrastructure issues.
“We’ve seen a real change in shopping habits, and conditions are very different compared to a few years ago, but there are still opportunities for commercial retail property with some optimism in shopping centre transactions over the last 12 months.
“In terms of Industrial, there is a still a huge gap between supply and demand which continues to put upward pressure on values, and we are seeing an increasing number of projects starting onsite as manufacturing businesses build on their successes.”
Commenting on the UK picture, RICS Senior Economist, Tarrant Parsons, says: “Overall activity remains relatively subdued across the UK commercial property market, with conditions seen as generally flat in Q2. That said, respondents now feel the market is moving towards the early stages of an upturn following a challenging couple of years.
“The near-term path for monetary policy will be key to the outlook for CRE investment going forward, although hopes of an immediate easing in lending rates may be optimistic given still sticky services inflation (even if the headline rate has returned to target). Away from the cyclical picture, a strong structural trend that continues is the outperformance of prime office markets compared their struggling secondary counterparts. In particular, prime offices across London are seen delivering solid capital value and rental income returns over the coming twelve months.”