Capital Economics predicts steady market

Nia Williams

July 28, 2010

Commenting, Kelvin Davidson, property economist at Capital Economics, said: “The latest Colliers/Real Estate Capital (REC) survey suggested that rental and capital values will be largely unchanged over the next 12 to 18 months.

“In the absence of an obvious trigger (e.g. higher interest rates) for renewed falls, we also continue to expect broadly stable property prices over the remainder of 2010 and in 2011.

“This survey contained a minor upward revision to 2010 all-property rental growth expectations (from about -3% to -2%) and a small downward revision to the 2011 figure (from +1% to zero). Capital growth expectations were unchanged at around +5% for 2010 and about -1% for 2011.

“In other words, respondents to this survey envisage a pretty quiet 12 to 18 months for the commercial property market, with rental values remaining broadly stable but a small increase in investors’ required yields pushing down capital values slightly.

“Indeed, the survey suggested that the level of yields that investors are seeking on secondary property has already ticked up a little. If anything, those views are slightly more downbeat than the most recent IPF Consensus and our own forecasts, which were both formulated back in May.

“But the latest Colliers/REC survey does tend to square with anecdotal evidence that, more recently, some investors have lost confidence in the ability of commercial property prices to hold up.

“Certainly, concerns about the impact of the fiscal squeeze on the economy will not have helped property investors’ sentiment.

“At present, however, we struggle to see a trigger for any renewed downturn. For a start, bond yields are low and we expect them to stay that way until at least the end of 2011, while a high property/bond yield spread suggests that commercial property as a whole is not overvalued.

“Similarly, the bulk of the rental downturn has passed.

“Admittedly, the risk of loan defaults or failed refinancing – and the rise in forced sales that would result – will remain a lingering threat to commercial property prices for several years yet.

“But, for now, much market commentary suggests that there is still an excess of buyers. As such, a moderate rise in the supply of property being put onto the market could probably be absorbed without a downward impact on prices.

“Overall, unlike in mid-2007, there is currently little evidence of a bubble in commercial property capital values and, while yields in some segments may move out a little, we continue to expect a plateau rather than a temporary peak.”

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