Both investor and occupier sentiment turned negative in Q3, with fears over the upcoming Autumn Budget delaying decisions and dampening market activity, RICS’ latest commercial property monitor has found.

Just 22% of respondents now believe the market is in recovery. Credit: Shutterstock / Graeme J Baty

Confidence weakened across the commercial sector in Q3, with RICS’ occupier sentiment index dropping to -12, its weakest reading in nearly two years, and investor sentiment sliding to -10.

The survey found that fears over the Budget on 26 November are hurting confidence and delaying investment decisions, with just 22% of respondents now believing the market is in the early stages of recovery.

The sector reported rising uncertainty, fiscal tension and softening demand, driven by speculation around tax rises, pension reforms and tighter fiscal policy.

The Q3 property monitor found that tenant demand for commercial space had declined nationally, with retail hit the hardest, falling 21%. This came as the Confederation of British Industry warned earlier this week that British retailers had seen another drop in sales in October and were expecting a further fall in November.

For the first time since 2012, excluding the Covid lockdowns, occupier demand for industrial space dipped below zero.

RICS said landlords were feeling under pressure, with rising vacancies and increasingly generous incentive packages for occupiers, signalling growing competition to secure tenants.

London was the one location to defy the trend, continuing to experience stronger demand and more resilient rental growth.

Positive news also came in the alternative sectors, with data centres, aged care, multifamily rental, student accommodation and life sciences standing out as growth markets.

Tarrant Parsons, head of market research and analysis at RICS, said that despite “pockets of resilience” in the prime and alternative sectors, the near-term outlook had become “more subdued amid an increasingly challenging near-term macro environment”.

He added: “The latest UK Commercial Property Monitor illustrates reduced market activity. Both occupier and investor demand experienced slight dips this quarter. A cocktail of elevated bond yields, above- target inflation and fiscal policy uncertainty is creating caution across investors.

“Landlords remain under pressure to offer increasingly generous incentives as vacancy rates continue to move higher. Meanwhile, the appetite for secondary assets continues to wane.”