Property bounces back nine months earlier than expected

Published 07th Apr 2010

The strength of London’s economy has led to a recovery in commercial property rental values nine months earlier than expected, according to research from Cluttons.

However, in its latest Commercial Property Market Outlook, the firm advises against unfounded optimism.

Capital values has risen by 11% since July, the firm said – the first growth for two and a half years. However this remains 38% below June 2007.

John Barrett, partner and head of valuation and investment at Cluttons, said: “The first quarter of 2010 should be similarly positive, as current buying activity is being fuelled by increased allocations to property by both institutions and private investors. However, it is strong occupier demand that leads to sustainable rental growth, which is really the motor of long term property performance. The sharp recovery in prices over the past 6 months should not ignore the underlying fragility of most occupier markets.”

London

Improved confidence has led to more occupier deals in the City and West End of London over the last quarter, leading to a recovery in rents. In the City rents have recovered to £49/sq ft from £42.50/sq ft in the third quarter of 2009.

In the West End, prime rents have remained unchanged at £75/sq ft and take-up has improved.

Yields have also fallen to 5% or below in some cases due to demand for good stock in central London.

Regional outlook

Yields across the regions have also fallen by around 25 basis points, despite falling prime rents in city centres of between 5% and 10% on average.

Retail and industrial

In the retail sector, the outlook remains bleak, Cluttons said. While 2009 was not as bad as expected, 2010 is likely to be more difficult. 10% of shops are empty in the UK and this number is likely to rise.

In the industrial sector, property demand is still weak and headline rents fell by around 5% last year. However a lack of speculative development means rents may grow from 2012.

Barrett said: “Whilst Q1 2010 has been positive, fears of a moderate dip and weak occupier demand are casting doubt over property’s continuing recovery for all but the very best stock. The ongoing uncertainty surrounding the General Election and perceived post Election austerity cuts continues to cast a shadow over all sectors of the market.

“While doubts remain, we expect investors to revert to the fundamentals, which will no doubt have a further polarizing effect on an already disconnected market.”

Source: ' Property Week '

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