Capital values will continue to fall across all sectors by another 15% to 20% with the majority occurring during 2009 according to Gerald Eve's Spring Investment Brief. Gerald Eve expect the all property total returns will be negative in 2009 (-7.9%) and then returning to positive in 2010 (3.6%).
Although UK property derivative pricing suggests a more pessimistic prognosis Gerald Eve believes this is currently overstating the likely outcome. Gerald Eve anticipates the worst performing sub-markets in 2009 will be West End and City offices, producing returns of -11.8% and - 10.1% respectively though these figures are considerably less pessimistic than the IPF consensus figures.
The agent forecasts a return to positive total returns across all of the sub-markets in 2010, although this is mainly due to the income component of return with capital growth remaining negative across all sectors. Gerald Eve's head of investment Mike Riordan says: "Well-let prime properties ( with leases over 10-15 years duration) are currently experiencing yield stabilisation with a return to positive, albeit small growth by the end of 2009. Lot sizes of under £30m will attract the most interest as these will be the easiest to source debt for".
Gerald Eve forecasts increasing yield spreads between primary and secondary property, smaller and larger lot sizes, differing tenant and income profiles and geographical location. Spreads between smaller and larger lot sizes have significantly widened between 100 and 125 basis points not withstanding the same income profile. Riordan adds: "We believe that the UK will see regional hot and cold spots in terms of the timing of commercial property returns moving back into positive territory again. In general, London and the South East have the most encouraging outlook currently."
Gerald Eve believes returns in 2010 and 2011 will largely be dominated by capital appreciation when it arrives. Rental levels generally will be falling or at best stagnant. This is consistent with the general deflationary factors in the economy feeding through to occupier demand.
Source: Brown Lloyd James Financial