Poor economic recovery to dampen UK commercial property market growth, says economic consultancy

KUALA LUMPUR: The current economic recovery in the UK’s commercial property market may slow down in 2010, in tandem with the expected pace of economic growth, according to an economic consultancy.

Despite a positive prediction, the UK’s gross domestic product (GDP) is expected to rise at below trend rates of just 1% in 2010 and 1.5% in 2011, said Capital Economics Ltd in a statement dated Nov 24 accompanying the release of its Commercial Property Analyst 4Q2009 report.

The weakened recovery will undermine rental values, which may fall by a further 8% from current values, it said.

Thus, the consultancy is maintaining its 2010-13 forecast of an average 8% to 9% all-property total return per annum, it added.

Meanwhile, the resurging investor appetite due to the relative inexpensiveness of property to bonds and equities may further drive down capital values in 2011 and perhaps even 2012, it said.

Nonetheless, the current resurgence can be sustained, causing the Investment Property Databank (IPD) all-property initial yields to decline by at least 60 basis points over the next six to nine months, it said.

This will leave property yields about 80 basis points lower than their highest earlier this year, reflecting the expected drop in bond yields, it added.

In terms of sectors, the consultancy said industrial total returns are expected to outperform the all-property average due to the external sector gaining importance as an economic driver of growth over the next one or two years, helped by a weak pound.

Meanwhile retail total returns will be held down by the continued readjustment of household finances, it said.

While the predictions are still in positive territory, the consultancy cautioned: “However, as we have noted in the past, any near-term mini-boom that is not founded on fundamentals – such as rising GDP, rising rental values and falling voids – may result in property becoming overvalued again. That could potentially set the scene for a renewed downturn beyond 2010.”

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