February 2010
Data released in February indicated a more modest increase of 1.0% in UK commercial property values during January. At the sector level, offices delivered 1.1% capital growth while retail and industrials grew 1.0% and 0.6%, respectively. As a result of the rapid capital growth at the end of 2009, initial yields (rent divided by capital values) have fallen in recent months and are now at 7.0%.
The disconnection between the investment and occupier markets continues to indicate fragility in the market. Rental value growth remains negative in most areas although the rate of decline has been slowing in recent months. Rents in the retail and industrial sectors fell 0.3% and 0.2%, respectively, in January. Office rents were actually flat in January although central London offices produced growth of 0.2% in the City and 0.3% in the West End. The lack of new development in the central London office markets means occupier demand has suffered less than expected.
There is still a concern that the recovery is not yet sustainable and some readjustment is likely in the investment market in 2010. We expect that the biggest change is likely to be an increase in forced sales by banks as they seek to reduce the £250 billion of outstanding debt to UK real estate. Increased sales by receivers in the final three months of 2009 may be an early indication of this.
