Capital depreciation in UK commercial property ended the first quarter at a pace consistent with declines seen in the first two months of 2009, at -3.1% in March, according to the IPD UK Monthly Index.
The compounded capital movement over the first quarter was thus -8.9%, according to the Index, which while a significant attenuation from the decline of the final three months of 2008, at -15.0%, is still much steeper than the decline over the same three-month period last year, at -4.7%. The all property peak-to-trough decline in UK commercial property now stands at -41.4%.
Retail, Office and Industrial capital growth rates in March were -3.4%, -3.2% and -2.4%, respectively. All property initial yields which have risen every month since June 2007 increased by a further 23 basis points to 7.66%, with yields moving out across all sectors. Income returns also rose across all sectors, with the all property average ending March at 0.65%.
The main driver of movements in capital values is changing; while yields are continuing to rise, the downward pressure on rental values is becoming an increasingly significant contributor to capital depreciation. This rental pressure is manifested in an apparent switch from investor appraisals of future expected cash flows to the cash flow expectations themselves, as measured by rental value growth. All property rental value growth in March was -1.34%, which implies a more rapid correction in expected future cash flows from commercial property than at any time in the IPD UK Monthly Index's 22-year history.
The most pronounced monthly movements in rental values were in Offices, at -2.6%. In March Offices, historically the most volatile sector, surpassed the previous record monthly negative rental value growth rate dating back to December 1992 when the sector fell by -2.4%. By contrast, the monthly rental value falls in Retail and Offices were shallower, at -0.86% and -0.56%, respectively.
Malcolm Frodsham, Research Director at IPD said: "Tenants' are seeing downward movement in rents quicker than in previous property recessions because leases have become shorter and more flexible, with greater break clauses. Although, while this momentum in falling rents is a concern for property owners, an implied income return of over 8%, based on annualizing March's figure, must be whetting the appetite of value and income seeking investors."