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Demand for commercial property in Wales fell during the second quarter of this year, as the market contends with increased interest rates and caution from prospective occupiers. According to the latest Royal Institution of Chartered Surveyors (RICS) commercial property monitor, a net balance of -19% of property professionals surveyed in Wales reported a fall in demand in Q2 2023.

Demand for both office and retail spaces fell in the latest quarter, however prime industrial spaces continued to perform well with 25% of property professionals reporting a rise in demand. The industrial space sector also achieved record rents in Q2. St Modwen Park in Newport secured headline rents of over £8 per sq ft.

In the investment market, a net balance of -28% of surveyors continued to report falling enquiries from investors. A steep fall in demand from investors was evident in the office sector, (-50%) amid changing work patterns, and retail space sector (-38%). While, the industrial space sector was recorded as broadly flat.

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As a result, overall capital values and rents are expected to fall over the next three months. A net balance of -30% of those surveyed in Wales expect net capital values to fall across all sectors over the second quarter of 2023, with all three subsectors anticipated to see declines.

While a net balance of -24% of respondents expect a fall in rents over the next three months. Both office rents and retail rents are expected to fall with a net balance of -38% and -50% expecting a decline, respectively. Although, many surveyors (+17%) expect rents in the industrial sector to rise.

Chris Sutton MRICS, of Sutton Consulting LTD, said: “The commercial property market in Wales is battling the headwinds of increased interest rates and caution from those occupiers considering future workspace requirements. However, the prime industrial sector continues to perform strongly with St Modwen’s large speculative scheme in Newport securing record headline rents of over £8 per sq ft.

“The office market continues to adapt to changing working patterns with in-town more buoyant than out of town. Healthy demand for smaller Grade A suites in Cardiff city centre is the highpoint of an office market where the broader challenge will come from the need to repurpose larger secondary office buildings to alternative uses.”

Tarrant Parsons, senior economist at RICS, said: “The stubbornness of º£½ÇÊÓƵ inflation over recent months has once again shifted the outlook for monetary policy, with further interest rate hikes from the Bank of England now priced-in across financial markets. This has, almost inevitably, impacted sentiment within the commercial property market, as higher borrowing costs weigh on investor demand and place renewed pressure on capital values.

“Meanwhile, occupier activity, although also losing some momentum in Q2, appears a little more resilient at present. As such, this is reflected in still positive rental growth expectations for the year ahead across the industrial sector, prime offices, and for several of the more alternative asset classes tracked in the survey.

“This week’s º£½ÇÊÓƵ Government announcement on loosening regulations surrounding the conversion of certain types of commercial property into residential use could encourage investment opportunities. If carried out to a suitable standard, these types of conversions have the potential to reduce the overhang of vacant retail space and provide much needed housing in central locations. However, while these measures could prove beneficial at the margins, given the scale of the challenges around housing supply and unused retail premises, they are unlikely (on their own) to be sufficient to fix the deeper market issues.”