BUSINESS property demand rose in the first three months of the 2005, despite a lacklustre retail sector, according to the latest research by the Royal Institution of Chartered Surveyors (RICS).

With demand having risen for six consecutive quarters, the subsequent fall in availability has led chartered surveyors working in commercial property to upgrade their expectations of rent rises to their highest in four years.

Surveyors are expecting modest rental increases in the office and retail markets with optimism spreading later to industrial premises after a prolonged period of lacklustre performance.

However, overall market confidence levels are still half that of the boom year of 2000.

With demand increasing, and continuing hesitancy among some developers to build speculative development, the levels of vacant business space has dropped back at its fastest rate since late 2000.

Although the current market still favours occupiers, a degree of bargaining power has returned to the landlords evident by the fact that the value of inducements offered by surveyors to secure tenants fell for the first time in four years.

The office sector continues to enjoy the strongest growth although at a slightly slower pace than at the end of last year, thanks to the improved performance of the financial and business services sector, which has been an important factor. The buoyant distribution sector is underpinning demand in the industrial property market.

The slowdown in occupier demand in the retail sector has been accentuated by the impact of interest rate rises on retail spending and employment. Retailers remain cautious with enquiries down for the third consecutive quarter.

New occupier enquiries continued to rise modestly, in line with the growth in enquiries seen since 2004, with the office market once again leading the way. New enquiries for industrial space are rising at their fastest pace since the last quarter of 2000 after four years of declining interest.

Trevor Hines, RICS South East regional director, said: "With the London market enjoying a more positive outlook we can expect this growing confidence and demand to ripple out across the South East.

"With a stable economy and strong demand we can also expect to see the return of speculative development in areas where there is growing economic confidence."