Rents and capital values will decline further this year thanks to the lack of debt finance and the ongoing eurozone crisis according to the latest property forecasts from Jones Lang LaSalle.
The agent has downgraded its forecasts for all-property rents, which are now expected to fall by -0.4% in 2012 with all property returns at 2% compared to a historic average of 9%.
Rental growth over the longer term has also been reduced, averaging 1.4% per annum over the next five years.
JLL expects property capital values to fall by -3.7% this year, given declining rents and rising yields.
It expects equivalent yields to “show further outward shift in 2012” given the challenges facing secondary markets, before stabilising in 2013 and subsequently rising with the expected rise in interest rates and bond rates.
JLL head of forecasting Andrew Burrell said the figures disguised a mixed performance across sectors, with high street shops expected to be the weakest, with negative total returns of 3.3%.
“By contrast, London West End and City offices will outperform in 2012, with total returns of 5.8% and 4.5% respectively,” he said.
The industrial sector is expected to show modest returns of 2.6%, with standard industrials outperforming distribution warehousing.
Burrell added: “Weak demand partly explains subdued returns – we have adjusted our forecasts and all-property rents are now expected to fall by -0.4% in 2012. Rental growth over the longer-term has also been toned down, averaging just 1.4% per annum over the next five years.”
Jones Lang LaSalle’s research also highlights that the pace of rental growth in the offices sector is expected to exceed both industrial and retail sectors over the forecast.
London’s West End will continue to lead rental growth in the offices sector, averaging 4.9% growth annually over the next five years, as the supply of prime stock remains constrained and demand from occupiers and investors stays strong.
By contrast, offices in the rest of the UK will show further rental falls this year, weighed down by the weak demand for secondary properties.
Mark Jones, director in Jones Lang LaSalle’s strategic asset management team, added: “The recovery in the retail sector is expected to lag other sectors, with further rental falls expected in 2012, before showing modest recovery from 2013 onwards.
“Retail warehouses are anticipated to perform better than standard shops and shopping centres, with rental growth averaging 2.7% per annum over the five-year period. A lack of debt finance and weak tenant demand are expected to lead to further downward pressure on rents outside of retail warehousing and central London shops.”
Jack.sidders@estatesgazette.com
