Demand for commercial property slowed during the first half of the year.

The economic slowdown and after-effects of the September 11 terrorist attacks in the United States took their toll.

But the market looks likely to pick up during the next six months as the economy strengthens.

According to a report by the Confederation of British Industry (CBI) and property advisers GVA Grimley, 16 per cent of companies increased their property holdings in the last six months, while seven per cent reduced them.

This gave a balance of plus nine per cent of firms increasing their holdings, down from plus 22 per cent during the second half of last year.

The report found firms were more cautious about changing their property holdings during the first part of this year, with 77 per cent reporting no change, compared to 55 per cent in the previous report.

But demand was expected to improve in the next six months, with 25 per cent of firms saying they were likely to increase their holdings, while 11 per cent said they would reduce them.

This gave a balance of plus 14 per cent, up from plus 12 per cent at the end of last year and plus six per cent on the same point of 2001.

Stuart Morley, head of research at GVA Grimley, said: "The survey results suggest the last six months marked the trough in the property cycle and a gradual improvement is expected over the latter half of the year.

Nevertheless, almost two-thirds of companies expect no change in the size of their property holdings over the next six months."

Firms were more upbeat about the business situation than six months ago, with 37 per cent more optimistic and 14 per cent less optimistic - a balance of plus 23 per cent, compared with minus 39 per cent in the previous report.

Service firms took on more property holdings during the last six months than manufacturing ones, while the office and retail sectors recorded the second biggest increase.

The biggest rise in demand was in Scotland, where 23 per cent more firms increased their property holdings than those that reduced them, followed by London and the South East at 18 per cent and the Midlands at 14 per cent.

Demand is expected to increase in all regions, with the Midlands likely to see the biggest rise.

CBI chief economic adviser Ian McCafferty said: "The slowdown in demand in the last six months reflects the difficult economic conditions at the start of the year.

"Given the uncertainty surrounding the sustainability of the expected economic upturn, firms have been cautious about property commitments.

"With some signs of a pick-up in the economy, activity in the commercial property market looks set to be healthier in the next six months."