• Transaction volumes for 2008 ended 58% down on 2007 at £22.3bn. Many commentators expect values to fall by another 20% in 2009, although prime average yields appear to have stabilised at around 7% for those properties let on long leases to good covenants with fixed rental uplifts Although capital values dropped significantly during 2008, there is an increasing risk that voids, declining rental values and a continued lack of debt finance will contribute to a further undermining of confidence.

• The IPD All Property void rate increased in November by 0.6% to stand at 9.6%, with retail increasing by 1%, industrial by 0.5% and offices remaining relatively steady showing only a 0.1% increase.  However, the industrial sector void rate has increased by 2.6% since November 2007.

• A predicted fall in commercial property values of over 45% between 2007 to 2010 will exceed the fall in value seen during the recession of 1990-1992, when values fell by 40%. It is likely that offices will suffer the most with capital values down by perhaps 50%, with retail following at -40% and industrials at -35%.

• A two tier market is emerging, with only well secured, income producing, prime property likely to command yields of 7-8% by the end of this year. Any investment that does not display these fundamentals will continue to be heavily discounted. By the end of 2009 we expect the worst of the capital falls to have been realised.

• Secondary and tertiary property which remains un-let, will continue to fall in value throughout 2009 perhaps by a further 20% in addition to the falls already seen in 2007 and 2008. We do not expect this category of property to yield much better than perhaps 12% based on current Estimated Rental Values. Woolworths has now closed all of its stores with the loss of 27,000 jobs. Other retail casualties include Adams Children’s Wear, Morgan, Viyella, Wedgewood, Whittard, and Zavvi. Administration ‘pre-packs’ coming to the market show that many troubled retailers have salvageable core businesses despite having over expanded on the back of cheap finance. Surplus units will continue to come to the market and will exert further downward pressure on rental values that are already falling.

• Prime rents in the City of London which were around £52.50 per sq ft in December have now fallen to around £49.50 per sq ft. This brings them back to where they were 12 years ago. Headline rents are likely to be held artificially high where asset values need to be maintained. This will be accomplished by the granting of ever more generous tenant incentives. It is predicted that rents will continue to decline by perhaps a further 20% during this year.

• In the West End of London prime rents are now £90 per sq ft, although the letting market is so thin and covenant driven that ascertaining market rental value is almost impossible. A landlord may demand £90+ per sq ft from a secondary covenant, but might well accept £80 per sq ft from a blue chip tenant.

• In the regions, both Manchester and Leeds have substantial amounts of new office space coming on stream in 2009, which will undoubtedly put rents under pressure. It is expected that rents will fall between 5% and 10%, with Birmingham probably faring a little better than the average because of its strong international transport links. In Glasgow and Edinburgh there is still a degree of professional ‘churning’, although the financial services sector which had been very active is now largely out of the picture.

• The investment demand for multi let industrial estates remains surprisingly robust, with interest across all business sectors. The worst performing sector is likely to be large distribution warehouses which have largely been underpinned by retailers, many of whom now face falling sales. An exception to this could be units let to the main supermarket operators where investment demand remains fairly strong, particularly where units are let on long leases.

Sources: IPD, Colliers CRE, King Sturge

Wilky Consensus Forecasts for UK Commercial Property Investment

 

Rental Value Growth

	2009	2010
Provincial Offices	-11%	-6%
West End Offices	-13%	-4%
Industrial	-7%	-3%
Standard Shops	-11%	-6%
Retail Warehouses	-9%	-6%

Capital Value Growth

	2009	2010
Provincial Offices	-12%	-4%
West End Offices	-11%	-5%
Industrial	-9%	-1%
Standard Shops	-12%	-2%
Retail Warehouses	-11%	-4%

Rental Value Growth

	2009	2010
Provincial Offices	-12%	-3%
West End Offices	-11%	-0%
Industrial	-8%	-0%
Standard Shops	-11%	-3%
Retail Warehouses	-12%	-3%