Property Market

UK Property Market

The UK commercial property market appears to be stabilising after a tough two years. The IPD index shows that the decline in the rate of return has slowed since the beginning of the year and positive total returns in some sectors are expected next year. That said, the peak to trough fall to March 2009 is -41%. Capital values are expected to see a small fall in 2010, while rental values are expected to weaken by -7%. In certain prime locations, investors are growing increasingly bullish and confidence is likely to continue rising through next year. Prime yields have hardened over the last few months as the market begins to price in a recovery, but yields continue to lengthen for secondary stock.

Investment levels during the first half of 2009 have been at a record low, with around £7.1bn of commercial property transactions taking place. This figure should increase over 2009 as historically attractive prices tempt investors back into the market. While the banks' reluctance to lend slows the speed of recovery, their leniency over breaches of loan-to-value covenants, coupled with a constrained development pipeline, should ensure a quicker recovery than in the 1990s.

In the medium term, we expect commercial property returns to make a strong recovery with all property total returns predicted to average 5.9% p.a. between 2009 and 2013. Industrial sector returns are forecast to average 6.4% p.a. over the period, while retail properties are anticipated to return an average of 6.0% p.a. and offices 5.5% p.a.

Investment Yields

UK Property Total Returns