Occupier and investor demand for commercial property in Scotland has fallen further as the prospect of further interest rate rises weigh heavily on the outlook over the year ahead.

The Royal Institution of Chartered Surveyors (RICS) Commercial Property Monitor reveals a sharp fall in foreign investors, which some may also see as a reflection of political uncertainty during the summer.

Tenant demand in Scotland fell to its lowest since the first quarter of 2021, with a downward trend for both office and, in particular, retail space which has been negative for 26 consecutive quarters.

However, tenant demand for industrial property remained robust with an increase through the third quarter.

Overall rental expectations in Scotland are broadly flat for the three months ahead (down from +8% previously), with wide divergence between industrial (+41%) and retail (-52%).

In the investment market, respondents in Scotland cited a decline in enquiries during Q3 and the weakest return since Q3 2020.

A decline was seen across all three sectors, with industrial turning slightly negative for the first time since Q3 2020. Respondents said they had seen a sharp 35% drop in interest from foreign investors, one of the biggest falls since the series began.

The outlook shifted markedly during Q3 for capital values. Projections for office values in Scotland turned negative, with the net balance falling to -23% from +23% in the previous quarter.

For retail, already negative projections were downgraded further, with a net balance of -54% of Scottish contributors anticipating retail values falling in the three months ahead.

Alasdair Humphery of JLL in Edinburgh said: “Global events, added to rising cost of debt, higher gilt rate and increased construction costs are a soup of epic challenges but not all these and other factors apply equally across different property sectors and sub-sectors and so for some, opportunity will arise but there will be a concerted flight to quality and green buildings.”

Tarrant Parsons, RICS economist, added: “Deteriorating conditions across the UK economy are having an increasingly noticeable influence on the UK commercial property market, with higher interest rates, and the prospect of more to come, now clearly weighing on investor demand.

“The weaker survey feedback is particularly evident in the retail sector, as the cost-of-living crisis and falling consumer confidence takes its toll on household spending.

“Likewise, the office sector has also seen a renewed decline in demand, with ongoing structural changes to working patterns brought about by the pandemic further exacerbating the broader cyclical downturn in the economy.”