Gerald Eve's hard hitting Summer Property Investment Brief sees its forecasts revised downwards shaped by an economic outlook that remains negative and highly uncertain, despite recent anecdotal evidence.
It has downgraded the all property total return for 2009 by some 6.7% to -14.5%. It anticipates that total returns will become positive in 2010, albeit at a level that reflects income contribution with the underlying capital return still being negative.
Mike Riordan Head of Investment, says: "Whilst there are small pockets of activity in the prime markets across all sectors which point towards yield stabilization, and indeed in some cases a hardening, the prognosis for the market as a whole remains weak.
"Some funds have already expressed concern at the speed at which yields are hardening for some investments, citing the Asda distribution unit in Normanton, the Waitrose supermarket in West Byfleet, Powergate in Park Royal and the Malvern Retail Park in Malvern as examples of a possible overcorrection and threat to a steady and sustained recovery. It looks like a W-shaped recovery could be on the cards, caused by short spikes in demand and a subsequent realization that the economic fundamentals remain weak. And none of this takes into account the lack of debt in secondary markets."
Gerald Eve predicts a five-year annual average of 4.4% for 2009-13, similar to the return obtained over the five years to 2008 of 4.6% pa. At the sector level, the agent expects offices to be the worst performing sector in 2009 and 2010, with total returns of -16.5% and 1.6% respectively. This is largely due to the deep and prolonged slide in rental values expected to occur over the next two years.
Industrial property is expected to outperform other major sectors this year, although only marginally and with a negative total return of -11.1%. But Sally Bruer industrial and distribution research partner warns: "We do however have concerns with regard to the future volatility of this sector, particularly relating to demand and rental growth."
All three retail sub-sectors - standard shops, shopping centers and retail warehouses - have been severely revised downwards in Gerald Eve's projection of total returns in 2009. This particularly applies to shopping centers, where yields have moved out substantially over the first half of this year, and are forecast to generate total returns of -16.1% in 2009. But Head of Research, Gerald Eve partner Robert Fourt says: "We anticipate that the retail sector will outperform offices and industrials beyond 2009, with standard shops projected to be the strongest performing sector over the next five years, with an annualized return of 5.3% per annum."
Gerald Eve's forecast for all property rental growth in 2009 has moved out from -13.9% to -14.9% and the five-year annual average from 2009 to 2013 has fallen from -2.9% to -3.9%. This reflects the IPF consensus forecasts for 2009 which have become considerably more negative than the previously reported figures, now standing at -13.6% for 2009 with a five-year average of -4.5%.Gerald Eve report negative forecasts in all sectors.
In the office sector, Gerald Eve expect the fall-off in rental growth to continue. The five-year average for the period 2009-13 results in annualized rental growth of -5.7% pa, considerably lower than the 3% pa witnessed over 2004-08. Central London markets are suffering particularly badly at present and the agent expects this downward trend to continue in both the City and West End markets throughout 2010.
Rental prospects remain poor in the retail and industrial sectors, with industrial rental growth in 2009 at -7.9% projected to be the lowest annual figure since 1993. Bruer says: "This figure is expected to be the worst of the rental decline over the forecast period and the rate of decline is expected to slow over 2010-2011, but we do not anticipate a return to positive rental growth until 2012."
Standard shops' rents are predicted to fall to -10.6% in 2009 and -7.2% in 2010, shopping centers to -12% in 200