A combination of tight credit and weak economic conditions throughout the Eurozone continues to set the backdrop for the property market, according to Gerald Eve's latest Investment Brief. This backdrop, combined with the strong possibility of a partial Eurozone break-up, has resulted in Gerald Eve downgrading its forecasts from last quarter.
Gerald Eve's total return forecast for property in 2012 stands at 2.4%. This is buoyed by the performance of West End and City offices, in particular. The outlook for retail property is weaker with forecasts for standard shops at 0.5% and shopping centers at 1.1%.
Investment performance is likely to be characterized by the distinction between prime and secondary markets. Quality property will continue to hold its value faced with the wall of money chasing prime assets. A lack of development activity and lending constraints will underpin the performance of prime properties, while the secondary market will continue to suffer.
With the exception of Central London offices, rental growth expectations are subdued given the enduring economic conditions. Consumer expenditure looks fragile, along with occupier demand for space, meaning that further falls in rental values are almost inevitable. Along with industrials, the retail sectors are expected to deliver negative rental growth this year.
Despite the prevailing economic conditions, Gerald Eve does see room for significant improvement from 2013, with positive rental growth returning to all sectors. Richard Lines, Head of National Investment, comments: "Over the five-year period 2012-2016, we can expect to see an improvement compared to the preceding five years. We are likely to experience a return to positive albeit low level average annual rental growth across all sectors."
From a wider economic perspective, it is anticipated that gilt yields and interest rates will remain at low levels for the next 12-18 months, maintaining the current property-gilt yield gap of 4.6% into the medium term. Such a gap will be exacerbated by the positive impact on asset prices of the Bank of England's latest asset purchase scheme.
Lines adds: "While under normal circumstances such a yield gap would make property an attractive investment, the relatively low appetite for risk means the effects of higher potential returns will be somewhat diluted. Do not rule out some yield compression in overall terms given a flight to safety, from the Eurozone to the UK, but on certain largely prime assets expect income return and not yield compression to drive total returns for the foreseeable future."