Gerald Eve's spring edition of its highly regarded Investment Brief suggests there is some light at the end of the tunnel by predicting a steady recovery albeit after a subdued 2011.
Head of Reseach at Gerald Eve, partner Robert Fourt setting the scene said: "Apart from the final quarter's figures economic growth in 2010 was relatively strong. However, the economic recovery is likely to be sluggish over the next two to three years. We anticipate modest growth in 2012 and 2013 followed by a return to trend growth of around 2.5% per year thereafter.
"Whilst property returns were comfortably in the mid-teens for 2010, this was mainly on the back of the wave from the second half of 2009. The slowdown in the second half of 2010 was very marked and is a major backdrop to our more modest forecast for 2011 of 5.6% whilst also having regard to the economy. It is also of note in both real and nominal terms that the property market has only recovered about 50% of its value from the 2007 peak."
Given the relatively subdued economic background Gerald Eve predicts weaker occupational demand for commercial property with the consequent impact of low rental growth for the next couple of years. Prospects for enhanced total returns will be driven by yield impact, conditioned largely by the inflow of money from overseas purchasers, which Gerald Eve believes will provide some support for values over the next two to three years at least in Central London. But as a counterweight the unwinding of banks' real estate portfolios continues to be an ongoing threat to values and therefore, to the outlook for total returns.
Gerald Eve's prediction on total returns for 2011 is substantially down on 2010 at 5.6% with office sectors anticipated to deliver the highest returns at 6.7% with City offices hitting 8.5% and West End Offices at 7.8%, followed by industrials at 5.9%. Compared with 2011 the agent anticipates total returns will increase in 2012 to 9.8% and with returns consistently above 9% up to 2015. Its central scenario forecast for All Property is an average annual return of 8.8% over the period 2011-15.
Over the next five years 2011-2015 Gerald Eve expects annual all office total returns to average 8.9%, driven by the London office market, which, overall is anticipated to be the best performing sector.
Gerald Eve's outlook for rental growth in London offices has been revised upwards and it remains highly positive. For 2011 it is now predicting rental growth of 6.9% for West End offices and 7.2% for City offices. Over the five-year period it predicts Central London office markets will deliver the highest rental growth.
The news is less good for retailers. Indeed the Governor of the Bank of England has acknowledged that consumers are having the most difficult time since the 1920s, financial conditions being such that in real terms spending is set to fall to 2005 levels, which will have consequent short-term knock-on effects on retail rental growth prospects. Gerald Eve does not therefore anticipate any significant rental growth in 2011 across the retail sectors, with retail warehouses looking the strongest with 1% rental growth.
All Property rental growth over the five years will average nearly 3%, putting rental growth firmly back into positive territory when compared with an average of less than zero over the preceding five years.
Source: MJ2 Limited