Occupier demand and rental growth rises in December - commercial mortgages

25 January 2007

Demand for commercial property from occupiers increased during December, while rental growth also rose significantly, a new report by the Royal Institution of Chartered Surveyors (Rics) states.

According to Rics, rental growth reached 3.6 per cent, compared to 2.6 per cent at the start of the year - a trend the institution attributes to the strength of the officer sector, which saw rental growth rise from 1.1 per cent in January to 6.2 per cent at the end of the year.

While demand from investors, such as those with commercial mortgages, was "solid" during the final quarter of the year, total returns from commercial property "slowed a touch" last month.

"An upward shift in interest rate expectation has reduced the yield attraction of commercial property and will continue to temper demand during 2007," Rics states.

The new report contrasts with the opinion of Quentin Fitzsimmons, head of government bonds at Threadneedle Investments, who recently said that interest rates are unlikely to have a "major impact" upon commercial property returns.