Commercial property crashes as demand falls

Commercial property demand fell fallen at the fastest pace for over six years in the first quarter of 2008 and UK rental confidence has at the fastest pace for a decade.

This is according to research from the Royal Institution of Chartered Surveyors (Rics), which finds 30 percent more chartered surveyors reported a fall in demand for commercial property in the first quarter of 2008.

This compares to just 15 per cent in the final quarter of 2007.

According to the research, all sectors reported a fall for the second consecutive quarter, with the retail sector showing the largest decline, dropping to the lowest balance in the survey's history.

Similarly, 40 percent more chartered surveyors reported a fall in retail demand, compared to 27 percent in the last quarter.

The continuing credit turmoil and a slowing housing market are thought to be weighing heavily upon both retailer and consumer confidence.

Rics also finds the supply side of the market has loosened considerably, although it is too early to tell whether the influx of new property onto the market is the result of a deteriorating business climate or an attempt to avoid the empty property tax which recently came into effect.

Available space rose in the office sector for the first time in four and a half years, while available retail and office space rose at the fastest pace on record.

Rics began to collect data on the commercial property market in the first quarter of 1998.

Industrial properties appear to have been particularly affected by the changes to the empty tax regime leading to a record increase in available space in the sector.

"The drop in tenant demand is a particularly worrying development. This raises the possibility that rental growth will continue to weaken as the level of inducements are raised in a bid to keep property occupied," said ?

"The underlying softness in the market will not have been helped by the ending off the tax relief granted for empty property. However, while commercial property is likely to remain under some pressure for a while to come, from an investment standpoint yields are now approaching levels where they are beginning to offer some value."

Looking forward, surveyors continue to be pessimistic. Confidence in activity fell across all sectors with confidence in retail activity falling to the lowest level on record.

Also, surveyors now expect rents to fall in both the office and industrial sectors while in the retail market declines in rents are expected to double in the coming quarter.