Jones Lang LaSalle's latest property forecasts indicate that the sluggish economic recovery is continuing to take a toll on UK commercial property markets.
The UK economy slid back into technical recession in the first quarter of 2012 and is expected to grow by under 0.5% for the whole of 2012, according to latest forecasts. A lack of debt finance, coupled with the on-going uncertainty in the wider Eurozone region has further heightened investor caution.
Andrew Burrell, Head of Forecasting at Jones Lang LaSalle, said: "Against this economic backdrop, our total returns forecasts for 2012 have been revised down, with all property returns at 2.0% compared with a historic average of 9.0%. Performance across sectors is expected to be mixed.
"High-street shops will be weakest, with negative total returns of 3.3% this year. By contrast, London West End and City offices will out-perform in 2012, with total returns of 5.8% and 4.5% respectively. Meanwhile, the industrial sector is expected to show modest returns of 2.6%, with standard industrials outperforming distribution warehousing."
Burrell continued; "Weak demand partly explains subdued returns. We have adjusted our forecasts and all-property rents are now expected to fall by -0.4% in 2012. Rental growth over the longer-term had also been toned down, averaging just 1.4% per annum over the next five years."
Jones Lang LaSalle's research also highlights that the pace of rental growth in the offices sector is expected to exceed both industrial and retail sectors over the forecast. London's West End will continue to lead rental growth in the offices sector, averaging 4.9% growth annually over the next five years, as the supply of prime stock remains constrained and demand from occupiers and investors stays strong.
By contrast, offices in the rest of the UK will show further rental falls this year, weighed down by the weak demand for secondary properties.
Mark Jones, Director in Jones Lang LaSalle's Strategic Asset Management team, added: "The recovery in the retail sector is expected to lag other sectors, with further rental falls expected in 2012 before showing modest recovery from 2013 onwards.
"Retail warehouses are anticipated to perform better than standard shops and shopping centers, with rental growth averaging 2.7% per annum over the five-year period. A lack of debt finance and weak tenant demand are expected to lead to further downward pressure on rents outside of retail warehousing and Central London shops."
Jones concluded: "We expect all property capital values to fall by -3.7% this year, given declining rents and rising yields. Equivalent yields will show further outward shift in 2012, given the challenges facing secondary markets. Yields will then remain broadly stable in 2013 before drifting upwards again in the last few years of the forecast to reflect the expected rise in interest rates and bond rates."
Source: Jones Lang LaSalle