More than five years of capital growth has been eroded in 18 months, says IPD (UK)

All Property UK commercial property capital values fell by a record -14.4% over the fourth quarter of last year, giving an annual decline of -26.4%, according to the IPD UK Quarterly Property Index Q4 2008 published today.

Meanwhile, total returns fell by -13.0% over the final quarter and by -22.1% over the full year. In nominal terms, these figures represent the biggest annual fall in capital values and lowest returns for UK commercial property investment on record. Capital values have now fallen -34.3% since the onset of the property market re-pricing cycle began in July 2007.

Fourth quarter and annual capital growth figures for the three principal sectors were -15.1% and -27.0% for Retail; -14.1% and -26.5% for Offices and; -13.7% and -25.7% for Industrials.

The story over the first seven years of the century is one of two parts. Over the five and a half years from 2002 to mid 2007, equivalent yields fell and capital values rose every quarter. In the 18 months to the end of 2008, equivalent yields have risen every quarter while capital values have fallen. Overall, the entire gains made over the boom cycle have been eroded in 18 months of successive falls, with capital values now broadly in line with December 2001 levels.

Evidence of the 'classic' property cycle – driven by swings in rental peaks and troughs – has not been present over 2008. There has been an extremely mild rental growth cycle; All Property rental values fell by -1.4% over Q4 and by -1.1% over 2008. The exception is of course in City and West End London offices, which fell by -3.9% and -8.4%, respectively over the fourth quarter alone.

In the case of West End offices, the significant falls may be partly be explained by the fact that top rents are supported by a narrow spectrum of occupiers – hedge funds, wealth managers and private equity firms, which have all been hit by the wider financial crisis.

The property market downturn has, therefore, been driven largely by yield movement, rather than by rental shocks. Property yields steadied in the first half of 2008, after a turbulent end to the previous year, until the second phase of the banking crisis caused another spike, driven by concerns over the global banking sector. By the end of 2008, initial yields moved out in Retail, Offices and Industrials by 6.8%, 6.7% and 7.6%, respectively while equivalent yields were 7.9%, 8.3% and 9.3%, respectively.

Income returns held steady over the 12 months under review, ending the year on a quarter high not matched since March 2005, at 1.5%.

Malcolm Frodsham, IPD Research Director, said: "The last 12 months has set a number of unwanted records in real estate returns with the worst ever year capping the worst ever month and worst ever quarter in IPD history. Such has been the severity of the falls in values that on a pure comparison basis the UK market now looks attractively priced, whether this matters or not to investors depends on an easing in the financial situation."

Since December 2007 the IPD UK Quarterly Property Index databank has increased by 30 portfolios with a total capital value at December 2008 of £7.7 billion encompassing 869 properties.

Source: IPD

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