Demand for office property saw the biggest increase in nine months signalling a recovery in the sector and leaving stagnant retail and industrial markets trailing says RICS.

Office lease lengths, which have continued to fall since the dot com crash of 2001, are no longer in decline. Inducements employed by landlords to entice potential tenants, such as rent-free periods and help with fit out costs, have levelled out.

Rents in the sector are expected to increase, with confidence at its highest in four years.

However, in a beleaguered retail sector, inducements rose further after a prolonged lull in consumer spending and lower tenant demand.

The run-up to the Christmas period saw an upturn in consumer spending, but this has had no significant impact on demand for retail space. Enquiries have fallen at their sharpest rate in four years over the last quarter.

Despite this, development continues apace, with the biggest increase in three years for office building project starts reported. Here, sharply rising commercial property values have been encouraging developers to take more risks.

Investors are showing a continued willingness to buy new commercial space, especially prime location, investment grade properties.

Good returns are keeping investors interested. Overall, commercial property capital values grew 12.2% last year and 11.6% in 2004, due to rising foreign investor and pension fund demand.

Further investment in the sector is expected in the run up to 6 April when the rules change for including commercial property in a Self Invested Personal Pensions (SIPPs). 2007 will see further interest with the advent of UK Real Estate Investment Trusts (REITS).

RICS spokesman Ian McRae commented:

"Development activity is up across the country which is unusual at such an early stage of a recovery in demand. Banks are still willing to back commercial property development despite the huge run-up in lending over the past decade, with banking exposure in this area rising sharply compared to other sectors of the economy.

‘Investors generally have a high level of confidence as the downturn in rents and activity since the dot com highs has been moderate compared to previous commercial property slumps. So long as the economic climate remains benign, there is no reason to expect a return to the boom and bust cycles of the past."

Source : RICS