IPD: Anniversary of value declines marked by shallow fall (UK)

British commercial property markets have marked the second anniversary of consecutive monthly declines in capital values with the shallowest fall since August 2007, at -0.9%, according to June's IPD UK Monthly Index. The all property peak-to-trough now stands at -44.1%, while the 12-month change in capital values is -30.8%.

Over this two-year period, the nature of this property recession has shifted from a yield-driven downturn – all property initial yields have moved out form 4.6% to 7.9% – to a deepening negative rental cycle, particularly over the six months to the end of June 2009. Yield impact, which measures the influence yield movements have on capital values, has followed a correlated 'double-dip' pattern, aligned with the two distinct financial market shocks. At the end of June, the yield impact had retreated to just -0.19% – the smallest monthly figure over the two-year period.

By contrast, the UK rental value cycle continues to deteriorate, by -0.9% in June, which has picked up momentum since last autumn caused by rising City and West End office vacancies as well as the collapse into administration of Woolworth's and MFI in the retail sector.

Rising vacancy rates and over-renting further underpin the shift in the phase of this property recession. Vacancy rates, which measure voids as a percentage of the aggregate income within IPD UK Monthly Index's databank, have risen from 8.2% to 12.1% in the two years to June 2009, on an all property basis. Similarly over-renting, which is the proportion of income from properties paying a rent higher than market value (also expressed as a percentage of total of income), has jumped from 2.5% to 6.7% over the same time period.

Capital value movements at sector level were diluted most significantly in the retail sector, at -0.7% last month compared with May's 1.6% decline, with 0.8% and 1.2% declines in the industrial and office sectors respectively. Income returns, which increase if capital values fall faster than rental income, rose again marginally to 0.69%.

Comparing the performance of UK commercial property returns with other asset classes over the two-year cycle is revealing. Commercial property has returned -36.7% per year compared to equities' -30.8%, as measured by the FTSE All-Share Index. Bonds, by contrast, have delivered investors positive returns of 26.3% over the two years to end of June 2009.

Ian Cullen, co-founding director at IPD said: "June marked the second anniversary of continuously falling commercial property values in a uniquely painful way – by being the first month in 24 in which falling occupier demand, rather than investor diffidence, played the lead role in driving capital decline."

Source: IPD

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