Changing use of commercial buildings needs increase in flexibility

RICS urges Government to re-examine commercial buildings use classes to aid flexibility of use going forward, as the Q1 2020 RICS UK Commercial Property Market Survey results point to a sharp deterioration in market sentiment, particularly in retail.

Headlines:

• Structural changes in UK commercial property exacerbated by COVID-19 justifies re-examination of use classes to aid flexibility – supported by the application of proper standards
• Various uses of commercial buildings should be more flexible to prevent them being ‘stuck’ as definitive uses – e.g. switching between uses on high streets should be made simpler with less red tape
• A sharp fall in tenant demand sees secondary retail rents over the next 12 months predicted to fall by close to 12%, and prime retail rents 8%. Industrial warehousing proves more resilient
• Critical that government engages with the industry to help to facilitate the transformation of the commercial property estate to reflect new needs of the economy

Following what appeared to be a promising start to the year for the commercial market, social distancing measures and forced business closures have now severely restricted activity and will continue to weigh heavily on the outlook over the coming months.

Looking at tenant demand, it is worth noting that social distancing measures were ramped up significantly in the middle of the survey collection window. Separating pre and post lockdown responses there is a marked deterioration in feedback post lockdown. While occupier demand over the past quarter has seen a decline at the headline level with a net balance of -24% and the indicators returning net balances of -67% for retail, -16% for offices and +6% for industrials, these readings fall to -82%, -44% and -7% respectively when analysing the submissions received post lockdown (from 1st of April onwards on an unweighted basis).

Unsurprisingly alongside the fall in demand, the availability of commercial property and inducements to take space both rose, with the retail sector seeing the sharpest rise in both areas.

Against this backdrop, the near-term expectations for rent saw 29% more respondents predicting a fall rather than rise in rents. This, however, is markedly different cross sector with retail seeing the largest fall. The sector figures see a net balance of 69% predicting a fall in retail rents, and 24% predicting a fall in office rent. Rents across the industrial sector are more resilient, with a flat near-term assessment from contributors.

Download: UK Commercial Property Market Survey: Q1 2020 (0.33MB)

The picture looks unlikely to pick up over the next 12 months, with predictions for rent negative in virtually all sub-sectors. Looking at the outliers, retail looks likely to take the largest hit with secondary retail rents predicted to fall by close to 12%, while the outlook is not much better for prime retail rents at 8%. Prime rents in the industrial sector are still expected to rise marginally.

On the investment side of the market, overall enquires continued to slip, and the same time, overseas investment demand declined in each area of the market over the quarter. Capital value expectations for the coming three months also fell from a headline net balance of -3% in Q4 to -35% in the latest figures. When broken down, expectations are negative across all sectors, with the net balance standing at -32% for offices, -8% for industrials and -71% for retail values.

When viewed at the twelve-month horizon however, prime industrial values are still expected to post modest capital value growth (even when survey returns before the start of April are excluded).

Simon Rubinsohn, RICS Chief Economist, said:

“The seismic nature of what is currently taking place in the commercial property sector should not be underestimated. Structural changes already underway particularly around ecommerce will be exacerbated, hitting the high street hard. But alongside this, the inevitable rise in agile working as businesses seek to build resilience against future pandemics will undoubtedly lead to a reassessment of demand for office space.

“Against this backdrop, it is critical that the government engages with the industry to build a collaborative approach to addressing the challenges and help to facilitate the transformation of the commercial property estate to something that better reflects the needs of a twenty-first century economy and also the continuing shortfall of good quality housing across all tenures.”

Tony Mulhall, Associate Director, Planning & Development, said:

“In the light of current events, there is even more of a need to rethink commercial property use-class regulation, which was produced in response to more static conditions, and make the case for greater flexibility.

“However, it is critical to ensure that this change is supported by the application of proper design and construction standards to ensure the end product, be it retail, office, residential or any other segment of the market is truly fit for purpose.”

Kindly shared by Royal Institution of Chartered Surveyors (RICS)