9 December 2008
New research from the Royal Institution of Chartered Surveyors (Rics) predicts a steep fall in office rental values as the economic downturn deepens.
Rics forecasts a 16 per cent decline in rents by year-end 2009, 11 per cent through 2010 and a further 6 per cent in 2011. RICS’ third quarter property survey is indicative of this trend, revealing evidence of bigger surveyor incentives and a fall in lease lengths.
The research also predicts that capital property values will fall by a further quarter before the market stabilises in 2010.
Rics third quarter commercial property forecast predicts that capital values will decline by 25 per cent by the end of 2009 on top of the 25 per cent fall already seen since the June 2007 peak. Peak-to-trough this fall would make the current recession more serious than that of the late 1970s and the early 1990s. The steep rate of the decline already suggests a more traumatic adjustment. In the early 1990s the decline was relatively shallow with capital values falling month-on-month for three-and-a-half years. The adjustment this time is likely to be shorter, but sharper.
Senior economist Oliver Gilmartin said: “We are only half way through the price correction in the commercial property market with values set to fall through 2009 and 2010 as rental declines gather pace.”
The office sector is particularly vulnerable because of the exposed position of the financial services sector. Rics expects capital values in the sector to decline by an additional 30 to 35 per cent.
The report does offer some solace, however. The reinforcement of the fall in commercial property prices by the weakening of sterling against the dollar and the euro is making the UK property market increasingly attractive to foreign investors – a trend which is likely to continue. The Dollar price of UK commercial property has already halved since June 2007, with a similar readjustment in the Euro and Yen prices.
Also valuation metrics suggest that property is now starting to approach fair value for investors –actually offering better value than bonds. The improved yields on property may offer unleveraged investors, like pension funds, good long-term value on their investments.
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