Gerald Eve's latest Investment Brief raises serious concerns over the lack of rental growth and the detrimental impact this could have on sustaining recovery and the servicing of debt. The lack of rental growth casts a considerable shadow despite Gerald Eve noting that the UK commercial property market saw a remarkable turnaround in the second half of 2009. Gerald Eve has adjusted its total returns for 2009 from a negative in double digits in the summer to -2.1%. and it is forecasting the prospects for 2010 at 6.9% which it admits is more bearish than some other commentators.
However it warns that the drivers of this turnaround are a combination of strong equity investor demand, particularly for prime assets, limited supply and international funds. "In other words, a flow of money into the sector rather than reflecting the fundamentals in occupier markets especially rental growth," says Gerald Eve's head of investment research, Robert Fourt.
Gerald Eve forecasts rental growth for all property in 2009 at -9.2% and -6.7% in 2010.
Looking specifically at retail Gerald Eve anticipates an increasing pick-up in consumer spending which will feed into rental growth in due course but it continues to predict negative rental growth for all retail segments over the next two years -4% in 2010 and -0.2% in 2011 offset with positive growth after that.
Total return forecasts for in 2009 and 2010 of (-10.4%) and (6.4%) respectively show shopping centers look to show poor performance overall compared to standard shops (2%) and (6.6%) and retail warehouses (5.6%) and (7.8%).
The office segments have seen the worst rental growth of the major sectors. Gerald Eve anticipates continuing negative growth figures resulting in average annual negative growth of -3.9% over the five years from 2009 to 2013. The average rental figures for the West End and City over the same period are expected to be broadly similar at -5.3% and -5%. Gerald Eve predicts rental growth in the City of -18.2% for 2009 and -10.9% in 2010 and for the West End -20.3% in 2009 and -13% in 2010.
The City office market has shown the worst performance and Gerald Eve predicts total returns for 2009 to show -5.4% in 2009 reversing to positive returns of 5.4% in 2010. But it is not until 2011 that total returns at 12.8% begin to pick up in performance, reflecting positive capital appreciation.
Turning to industrial average annual rate of rental growth from 2009-2013 will be in the region of -1% the least worst of all the sectors reported Gerald Eve predicts rental growth of -5% in 2009 and -3.1% in 2010 falling to -1.8% in 2011. Gerald Eve anticipates positive total returns of 1.6% in 2009 and 8.5% in 2010 with an average total rate of return of 9.8% over the years 2009-2013.
Fourt adds: "Until such time as the economy indicates both stability and growth, with the subsequent positive impact on rental prospects, the current 'improved' property outlook will remain very fragile."
Source: Brown Lloyd James Financial
