Commercial correction to be worse than 70s and 90s

Nia Williams

December 8, 2008

RICS expects the commercial property market to see at least 16% declines in capital values in 2009 and a further drop of up to 10 percent in 2010. Since the onset of the credit crunch in June 2007, capital values have already fallen 25 percent and with more falls to come, the cumulative downturn in prices will exceed the downturns experienced in both the 1970’s and 1990’s. Rising defaults and credit spreads will constrain a near term recovery in financing, preventing any recovery in the investment market over the next couple of years. Low interest rates, recovering global growth and improving valuations relative to other asset classes should see the downturn gradually begin to reverse on 2011.

The biggest declines are likely in the office sector with capital values expected to drop a further 30 – 35 percent bringing peak to trough declines in excess of 60%. Employment in banking, finance and insurance has accounted for the lion’s share of job creation since the millennium although has moved into decline over the past year. An acceleration in this trend is set to weigh on demand for office space, undermining rents. The retail market is also likely to suffer a similar fate and see capital values drop by a further 25 – 30 percent as consumers tighten their belts. The retail warehouse market is feeling the impact of the downturn and a further slowing of big ticket purchases is expected as transactions in the housing market remain subdued. Capital values declines in the industrial sector are expected to be less pronounced, falling a further 15-20% percent over the next three years, helped somewhat by a weakening pound and slow recovery in the global economy towards 2011.

Price declines will be exaggerated by falling rents and an increase in distressed selling as refinancing pressures bite. RICS expects rents to fall by ten percent in 2009, four percent in 2010 and three percent in 2011. The office sector is expected to be hit hardest with a 16 percent decline in rents in 2009, 11 percent in 2010 and six percent in 2011. With consumer confidence at its worst level for over a decade and consumer spending already falling, retail rents will also suffer. RICS expects rents in the retail sector to fall by seven percent in 2009, six percent in 2010 before stabilising by 2011. Rents in the industrial sector will be marginally flatter than elsewhere but even so rents are expected to fall by six percent in 2009, five percent in 2010 before beginning to edge upward by 2011.

Commenting, RICS senior economist Oliver Gilmartin said: “We are only half way through the price correction in the commercial property market with values set to fall through 2009 and 2010 as rental declines gather pace. Transaction activity is set to rise, however as more sellers become willing to accept lower bid prices.

“On a positive note, the rapid re-pricing across the market has pushed UK yields to among the highest in the developed world with a very wide gap emerging compared to finance costs. For unleveraged investors (like pension funds), high yields provide good long term value especially for prime properties.

“Stimulus plans by central banks worldwide and accelerated fiscal packages, might see a return to higher inflation once the worst of the current slowdown has passed, with property tending to act as a good hedge.”


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