Demand for commercial property slumps after Brexit referendum as London suffers most

A leading measure of investment demand for commercial property in the UK saw the steepest drop on record in the aftermath of the EU referendum, in which the country voted for Brexit.

The Royal Institution of Chartered Surveyors (Rics) said its survey of members found the balance between those reporting a higher or lower level of commercial property investment enquiries slumped to -16% in the second quarter of 2016, down sharply from +21% in the previous quarter. The survey was conducted in the three weeks immediately after the 23 June referendum.

London saw the biggest drop in investment demand with the city's property professionals recording a net balance of -41%, the lowest since 2009. On the occupier side of the market, such as those looking for office or retail space, demand was flat — the first time there has been no rise since 2012 amid the previous slowdown. The net balance for occupier demand was zero, down markedly from +21% in the first three months of the year.

A cloud of uncertainty has been released over the British economy since the voted. Businesses are delaying or pulling investment leading some economists to predict the UK will fall into recession. In turn, demand for commercial property is weakening. Moreover, commercial property funds were swamped with redemption requests as investors sought to pull their money out, leading to some suspending withdrawals while they sell off assets to raise capital.

"Political and economic uncertainty in the aftermath of the referendum result has clearly dampened sentiment in the commercial property market, with the tone becoming visibly more cautious right across the UK," said Jeff Matsu, senior economist at Rics.

"Although the impact is widespread, the drop in confidence has been most pronounced in London. Nevertheless, following several years of strong capital value and rental gains, momentum had already appeared to be slowing. Whether or not the sharp deterioration in the Rics survey data is a knee-jerk reaction that will unwind as the result is digested, or the start of a more prolonged downturn, remains to be seen."

To leave the EU, Britain must trigger Article 50 of the Lisbon Treaty so formal negotiations can begin. But the UK government has indicated it is in no rush to invoke Article 50 because it wants to ensure it has a robust strategy in place for the talks, which will take a maximum of two years, to secure the best deal possible. What exactly Brexit entails is still unclear.

"In laying out what we will negotiate for, there is a need for clarity for the ability of financial services to do business in the UK which will affect demand for office space, especially in the City of London," said Jeremy Blackburn, UK head of policy at Rics.

"Similarly access to the single market or potential tariff barriers will be key in the longer term for some industrial occupiers and exporters. And immigration plans could well affect the future supply of new commercial space onto the market through construction starts.

"Ministers need to lay out a clear timeline and set of ambitions for negotiating Brexit and our future trade relationships. First ministers in the devolved nations must play their part in providing reassurance for property markets."