Higher borrowing costs and tighter lending conditions are squeezing commercial property investment, according to the RICS UK Commercial Property Monitor.
The Q3 monitor saw occupier demand for commercial property remain stable, but investment sentiment weakened as rising gilt yields put further pressure on the outlook for property values.
Investment enquiries fell to a net balance of -11%, compared with -8% in the previous quarter. Overseas investment demand also remained negative across offices, retail and industrial property for a fifth consecutive quarter.
RICS’ credit conditions indicator fell to a net balance of -37%, from -23% in Q2, signalling a more restrictive lending environment.
The Investment Sentiment Index overall declined to -13 from -8, with the majority of respondents now viewing the market as being in a downturn – dashing hopes at the start of the year for a market revival.
Tarrant Parsons, head of market research and analysis at RICS, said: “The latest survey results point to a more challenging backdrop for the commercial property market, with the investment side bearing the brunt of higher borrowing costs following the recent rise in gilt yields to their highest levels in almost two decades. As financing conditions have tightened, expectations for capital value growth have softened, particularly in the near term.
“That said, market conditions remain far from uniform. Occupier demand has proven relatively resilient, albeit somewhat less robust than in the previous quarter. Prime offices and industrial assets continue to outperform, with respondents still anticipating rental growth and modest capital value appreciation across these segments over the year ahead.
“In contrast, sentiment towards secondary assets has weakened further, highlighting an increasingly pronounced divergence in performance across the market.”
Expectations for capital values over the next three months have also become more downbeat, with the headline net balance falling to -15% from -11%. Industrial property expectations moved into negative territory, while retail continued to record the weakest outlook among the three mainstream sectors.
The occupier market was more positive, although RICS recorded a slip in overall tenant demand to a net balance of -8% from -5%. Industrial demand was close to flat, while office and retail demand remained negative.
Despite this, respondents still expect rental growth for the best assets over the coming year, with prime office rental expectations returning a net balance of +41% and +38% for industrial, although both figures eased from Q2.
By contrast, rents for secondary offices and retail premises are expected to fall, underlining the continuing divide between prime and secondary property.