New research from analysts at JP Morgan Cazenove, led by Harm Meijer and Osmaan Malik, shows weakening forecasts for UK and European property.
Capital growth downgrade
The team expects UK property values to fall by 5.9% compared with its previous expectation of -3.4% (see graph).
Across Europe it has downgraded its capital growth forecast by around 3% on average, based on revised rental growth expectations.
It says the European review is also based on the expectations of a recession in the euro area in 2012, as forecast by its in-house economists. This has affected the property analyst team’s rental growth forecasts.
It predicts the strongest GDP contraction will be seen in Italy. Germany, it says, escapes relatively unscathed, with two quarters of -0.5% contraction, while the UK is very close to recession.
Shopping centres down 5%
The value of shopping centres in Europe is expected to fall by around 5% on average. The downgrades have been driven by lower expected rental growth and high costs of capital.
In the UK, the analyst is expecting rental declines of 2.8% and 1.1% over the next two years respectively, followed by modest growth of 1.1% in 2014. The initial yield of 7.13% should move out by 77 basis points to 7.9%.
This would lead to an 8.8% fall in valuations over the next 12 months, and compound an annual growth rate of -1.4% in average UK shopping centre values over the coming five years.
It sees the weakest 12-month return in Italy at -11.6%, followed by Spain on -10.5% and the UK. The average fall expected across the UK, Germany, France, Netherlands, Italy and Spain is 5%.
UK rents weaken
The company forecasts that prime retail values will weaken by 2.2% in the UK property sector. The team took a closer look at London offices, and the important distinction between prime and secondary retail space.
Once again, it downgraded its growth forecasts across the board and now expects to see, for example, City office values fall 7.3% on average over the coming 12 months.
These forecasts are driven by a cut to the firm’s rental growth expectations – it now expects 4% rental declines in 2012, compared with previous expectations of 6.1% growth.
However, it stressed that this capital growth forecast is for the entire City office market, so it includes both prime and secondary offices.
The team also envisages weakness in prime retail, with values forecast to fall by 2.2% in the next 12 months – albeit a better result than the 8.8% declines it expects for all UK retail.
Drilling into the City
The team created a London City office model, which it used to forecast vacancy rates that were then used to drive its rental growth expectations.
On the firm’s measure of the City, based on DTZ data, its forecast vacancy rates of 9.6% at the end of 2011 are set to increase over 2012 despite low levels of supply, as City firms shed staff.
The analysts expect vacancy rates to remain relatively stable over 2013 and 2014 as low levels of supply meet low levels of demand, although they are set to increase in 2014.
The team added that is does not expect the City will surpass any previous peak in vacancy rates, which rose to 14% in 2009 and close to 18% in the early 1990’s crash.
