At our recent Commercial Auctions Summer Review, we caught up with Simon Rubinsohn, Chief Economist at RICS, who was able to provide some much-needed insight into the current market conditions.
What sort of feedback are you receiving from RICS professionals regarding the state of the commercial property market in general?
The latest round of interaction with RICS members who work in the real estate sector suggests that the mood music is a little more cautious than previously was the case which may, in part, reflect some signs of a softening in the macro picture. Tenant demand at a headline level appears to be flatlining after a period of solid growth and while rents are still expected to continue rising, they may only do so relatively modestly. Despite this, investor appetite to acquire commercial property seems undimmed; more respondents to our most recent survey continue to indicate that buyer interest is rising rather than falling.
How is this playing out in terms of sector and regional dynamics?
A strong theme running through our numbers is the outperformance of the industrial and logistics sector. This is not a new story and is reflective of the big structural changes taking place in the way we choose to consume; significantly, if the feedback we have received is anything to go by, this process still has some way further to run with our key indicators for both rental and capital value expectations in the industrial sector remaining strongly positive. Partly because of this, the results for the retail sector continue to be more mixed although it is worth noting the significant dispersion depending on the location and the quality of the product.
Meanwhile, if I were to characterise the broader regional dynamic in the Q2 results, it is hard to ignore the more resilient tone to the sentiment being provided by those industry professionals working further away from the capital. Now this is obviously a fairly broad-brush assessment and it certainly doesn’t mean that there aren’t interesting opportunities in London. That said, I can’t say that I am wholly surprised by this outcome and suspect it is, at least in part, reflective of relative valuations.
Would you see the market as vulnerable to a correction?
A key issue in terms of the pricing across all asset markets, including commercial property, is the outlook for interest rates. Recent speeches from members of the Bank of England’s Monetary Policy Committee suggest that there is a more active debate going on around this issue at Threadneedle Street than has been the case until recently. However, the six to two vote at the last meeting in early August indicates that it is premature to even see the ‘emergency’ measures taken post the EU referendum being reversed any time soon.
Indeed, the signals that continue to emanate from the gilt market are that the cost of money will remain cheap for some time to come. Ten-year paper is currently still only yielding just over one percent (hard as it is to believe) with even thirty-year bonds offering a return of less than two percent. This is not to say that there is room for complacency however. Most traditional yardsticks do show the real estate market to look rich by historic comparison but this could remain the case for some time to come given the macro environment.
But what about Brexit?
I find it hard to want to be too definitive about this issue given the lack of clarity about what is likely to emerge from the ongoing discussions. Even so, I can’t pretend there aren’t some material challenges which could impact on economic performance with potential ramifications for some parts of the property market. This is being reflected in the insight we have received in the latest survey. However, it is interesting that alongside the worries about potential relocation of some parts of British businesses to mainland Europe, overseas investors continue to be attracted to the UK market. It is noteworthy that more than fifty percent of investment in real estate in the first half of the year has come from foreign buyers. This is pretty much consistent with what we are being told by RICS members with all sectors receiving some level of interest from overseas.