Demand for commercial property in the UK has fallen over the past six months for the first time in five years, according to a report by the Confederation of British Industry and property advisers GVA Grimley.
The survey shows a balance of five per cent of companies decreased their property holdings over the past six months. This is a significant turnaround since the last survey when a positive balance of 13 per cent of companies said they had increased their property holdings.
But the twice-yearly report does show an expected pick-up in the market over the second half of this year with four per cent of companies expecting an increase over the next six months.
Six out of ten firms did not increase or decrease their property holdings over the past six months. This figure is above the historical average and, the CBI says, may well reflect the economic and global uncertainties of recent months, with companies adopting a 'wait and see' approach.
Demand for property in the retail sector looks set to improve over the next six months, with a positive balance of 12 per cent expecting to increase their property holdings, compared with a negative balance of one per cent in the last survey. But the expectation is below the long-term average for this sector.
In contrast, demand in the office sector is expected to weaken, with a balance of four per cent expecting to decrease their property holdings over the next six months. Over the past six months demand remained stable with the same number of firms reporting an increase in holdings as reporting a decrease.
In the industrial property sector, demand is stronger for distribution property than for manufacturing property. The hard-hit manufacturing sector is expected to see a further reuction of property holdings by a balance of two per cent over the next six months.
A look at the regional breakdown reveals that the biggest turnaround in property demand was in London and the South East. It moved from being the best performer six months ago, with a positive balance of 15 per cent, to being the worst performer with a balance of plus one per cent. All other regions saw a clear improvement in property demand.
Looking ahead, the highest level of optimism is now in the Eastern region closely followed by the Midlands and the North. In the South East, distribution, transport and communication firms are expected to drive property demand over the next six months.
Stuart Morley, Head of Research at GVA Grimley, said: "Importantly, the survey was undertaken shortly after the end of the war in Iraq so, economic uncertainty was a less important feature than it had been. Within this overall scenario, we regard the positive balance of companies expecting to increase their property holdings over the next six months as encouraging.
“Nevertheless, with near static employment growth expected this year and many firms holding more office space than they require, it is unsurprising that a balance of companies expect to reduce their office holdings over the next six months. The survey also reflects the weak international economic climate for manufacturers, but shows a higher degree of confidence among retailers."
Optimism about the overall business situation has also continued to deteriorate, with 35 per cent of companies less optimistic about the next six months compared with just 13 per cent who are more optimistic. However, the balance of minus 22 per cent is an improvement on the minus 29 per cent balance reported six months ago.
Business output was virtually unchanged over the past six months, the balance of one per cent reporting an increase being the lowest for nine years. When asked six months ago, a balance of 34 per cent of firms were expecting output to rise. Over the next six months, a balance of 12 per cent of companies expect output to increase, an improvement compared with the past six months, but well below the long-term average of 38 per cent.
Doug Godden, CBI Head of Economic Analysis, said: "The fall in demand for commercial property in the first half of this year reflects the same pressures that have held back business investment more generally: weak demand from overseas, uncertainty about consumer demand in the UK and a fierce squeeze on profitability.
"Firms expect to increase their property holdings over the second half of the year, but will no doubt wish to see more solid signs of global economic recovery before acting on these plans."