The IPD property derivative curve provides evidence of a big boost in short-term sentiment, writes Michel Heller, but it also indicates a more negative outlook in the long term.
In October, contracts for 2009 gained 4.15%, pushing out of negative territory for the first time this year. Contracts closed the month at -0.25%, but for a period they had traded at 0%, implying that capital values will be flat this year.
This was the first time that the 2009 contracts, which once reached alow of -21%, have not implied negative total returns this year.
The IPD estimate of annual recorded UK commercial property at -7.9% at the end of September, indicating that the market expectsa big rise in capital values over the course of the year.
The 2010 contract has also continued its rally, gaining 1% over the past month to price in expected total returnsfor the year of 10.15%. From the lows the market sawin June this year, a 20% rebound in total returnsis expected by December 2010.
However, with pricing falling significantly over the past month, it is expected that suchpositive sentiment will not besustained inthe longterm.
At the end of September, the market was pricing in an annual average total return of 10.25% pafor 2011-2014. This has sincedropped by 3%.
The market expectsinitial yields to be 7.3% by the end of 2010, and 7.6% by 2014.
