The UK commercial property market has seen a significant drop in confidence and investor demand following the Brexit vote, according to the Q2 2016 RICS UK Commercial Property Market Survey.

Both the investment and occupier sides of the market have been affected by the change in sentiment and both rent and capital value expectations are now in negative territory. Although opinions are mixed, the largest share of respondents across the UK (36%) feel the market is now in the early stages of a downturn. All parts of the UK saw an increase in the proportion of contributors sensing the market is turning down. London exhibits the highest proportion, with 54% of respondents taking this view.

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. All sectors covered by the survey suffered a drop in investor demand and foreign investor appetite declined at an even faster rate with 27% more respondents to the survey seeing a drop in interest.

The fall was most pronounced in London with the investment enquires indicator posting the lowest reading since 2009 (41% more respondents saw a drop in demand for commercial real estate).

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.

Political and economic uncertainty is also hitting confidence on the occupier side of the market. On a UK-wide basis, occupier demand failed to rise for the first time since 2012 (as the net balance fell from +21% previously to a reading of zero in Q2). A cautious demand backdrop is producing significantly weaker rental projections across the board. This is especially the case over the shorter term with 7% more respondents now expecting rents to decline over the coming quarter.

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.

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

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