News

Gloomy future for capital values

News

Bridget O’Connell

28 November 2011

Investment/finance

The outlook for commercial property has significantly deteriorated, as the industry braces itself for a period of poor rental growth and falling capital values.

According to the November IPF UK Consensus Forecast, the projected rental growth rate for the next 12 months has plummeted over the quarter, from 1.7% forecast in August to less than 0.6%.

The outlook for 2013, by comparison, suggests some improvement. However, this is not enough to counter the poor near-term prospects that have lowered the five-year average forecast from 2% in Q3 to 1.58%.

The survey, which canvasses the opinion of around 30 property advisers and fund managers on a quarterly basis, found that the expectation for capital growth this year has improved slightly to 1.2%, from 1.1% recorded in August.

But this proves to be short-lived as weakening sentiment in the rental market comes into play and expectations of capital value growth plunge 1.7% into negative territory in 2012.

Looking further ahead, the market does not expect any respite, with the 2013 and five-year average growth rates both weakening further, from 2.1% and 1.4% last quarter to 1.3% and 0.9% respectively.

Marginal pick-up

The marginal pick-up in 2011 capital value growth is reflected in a slightly healthier forecast for total returns, which are bumped up by 10 basis points to 7.5% in 2011 – although this lags behind the 1% quarter-on-quarter improvement earlier in the year.

Conversely, 2012’s total return is now expected to come in at 4.5%, which falls below the anticipated 6.2% income return owing to the adverse impact of falling values, before a modest recovery in 2013.

The five-year average total return forecast has continued its decline, from 8.4% pa at the start of the year to 7.2%.

At a sector level, offices and retail warehouses are both expected to continue posting positive rental value growth next year – albeit at lower levels – although only offices’ capital value is expected to increase and only by a marginal 0.1%.

By 2013, all five sectors are forecast to be delivering positive rental and capital value growth, leading to less disparity in total returns.

The outlook for commercial property has significantly deteriorated, as the industry braces itself for a period of poor rental growth and falling capital values. According to the November IPF UK Consensus Forecast, the projected rental growth rate for the next 12 months has plummeted over the quarter, from 1.7% forecast in August to less than 0.6%. The outlook for 2013, by comparison, suggests some improvement. However, this is not enough to counter the poor near-term prospects that have lowered the five-year average forecast from 2% in Q3 to 1.58%. The survey, which canvasses the opinion of around 30 property advisers and fund managers on a quarterly basis, found that the expectation for capital growth this year has improved slightly to 1.2%, from 1.1% recorded in August. But this proves to be short-lived as weakening sentiment in the rental market comes into play and expectations of capital value growth plunge 1.7% into negative territory in 2012. Looking further ahead, the market does not expect any respite, with the 2013 and five-year average growth rates both weakening further, from 2.1% and 1.4% last quarter to 1.3% and 0.9% respectively. Marginal pick-up The marginal pick-up in 2011 capital value growth is reflected in a slightly healthier forecast for total returns, which are bumped up by 10 basis points to 7.5% in 2011 – although this lags behind the 1% quarter-on-quarter improvement earlier in the year. Conversely, 2012’s total return is now expected to come in at 4.5%, which falls below the anticipated 6.2% income return owing to the adverse impact of falling values, before a modest recovery in 2013. The five-year average total return forecast has continued its decline, from 8.4% pa at the start of the year to 7.2%. At a sector level, offices and retail warehouses are both expected to continue posting positive rental value growth next year – albeit at lower levels – although only offices’ capital value is expected to increase and only by a marginal 0.1%. By 2013, all five sectors are forecast to be delivering positive rental and capital value growth, leading to less disparity in total returns.