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Brexit hits confidence in commercial property market in UK

The Brexit vote caused a significant drop in confidence and investor demand in the UK commercial property market, according to a survey by the Royal Institution of Commercial Surveyors (RICS).

Both the investment and occupier sides of the market have been affected and both rent and capital value expectations fell into negative territory.

A survey by RICS of its members found that opinions were mixed but the largest share of respondents across the UK (36%) feel the market is now in the early stages of a downturn.  That figure was 54% in London.

During Q2 2016, investment enquiries fell sharply across the UK with the net balance falling to -16% following +25% in Q1.  This is the largest quarter on quarter deterioration in the reading for investment demand on record.

With investment demand falling right across the UK, capital values are expected to decline, albeit modestly, over the year ahead in almost all areas of the market.  Values in the secondary retail and office segments are expected to see the most visible decline.

The fall in demand is producing significantly weaker rental projections, especially over the shorter term with 7% more respondents now expecting rents to decline over the coming quarter.  This stands in stark contrast to Q1, when 26% more respondents anticipated rents would increase in the near term.

The office and retail sectors experienced the steepest decline in rental projections with the reading for both now in negative territory.  In the industrial sector, rent expectations remain positive due to lack of supply and a more resilient demand picture.

Rent expectations are most negative in London, pointing to a fall of around 3% over the next 12 months at the headline level.  Secondary retail rents are expected to suffer the largest decline in the capital.

However, the supply of property remains tight, especially in the industrial sector, and this should provide a certain degree of support to rents and capital values for the time being.

Whether or not the sharp deterioration in the RICS survey data is a kneejerk reaction that will unwind as the result is digested, or the start of a more prolonged downturn, remains to be seen.

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