The UK commercial property industry faces further doom and gloom with the continuing European debt crisis hitting sentiment and increasing risk aversion, according to the latest Real Estate Investment Forecast from Colliers International.As they are one of the world’s largest commercial property organisations, we have to assume that they know what they’re talking about.
The increased likelihood of a ‘double dip’ recession in Europe and the US has seen a significant rise in negative outlook in the market with the All Property total return commercial property forecast for this year at 8%, down from Colliers predicted quarter two forecast of 8.4%.
Prime real estate assets retain strong interest across the commercial segments, and it is believed that despite falling bond yields commercial property pricing in Central London may be hitting its base.
Demand for commercial property in Central London has been steady, and rental growth is expected as supply remains restricted. Colliers reports 13 requirements for commercial property, both active and potential interests, of over 100,000 square feet, and a steady demand for medium-sized commercial property of 10,000 to 40,000 square feet.
Investment in distribution warehouses is on the up too, with industrial commercial property occupiers announcing 15 ‘design and build’ schemes in the past three months compared to a less than impressive none in the previous three years. Occupiers with an immediate need are resorting to using smaller commercial property units to supplement their existing operations in the short term.
Rahim Jiwani, Property Economist at Colliers International, says that the volatility of equities markets globally means no asset class, including commercial property, can expect to be immune from uncertainty. The European debt crisis has increased likelihood of a global debt crisis, with attention shifting to the arguments in the US Congress over the debt ceiling and the subsequent downgrading of US debt.
‘This summer has seen surprising amounts of risk aversion as the AAA-rated UK gilts have fallen from 3.4% at the beginning of July to 2.3% by the middle of August,’ he says.
‘The strongest returns are expected in 2013 as the economy begins to approach trend growth. From 2012 to 2016, we expect All Property to have an annualised 7.9% return led by the City of London serviced offices and a rebound in shopping centres further along the horizon,’ he explained.
‘All Property equivalent and initial yields have fallen slightly in the year to date and may see further marginal compression by year end as rental growth trends begin to strengthen. Rental growth for All Property over the 12 months ending in July nudged positive for the first time since October 2008, according to the July IPD Monthly Digest. Rental growth for 2011 is forecast to be 0.1%, but will strengthen over the next couple of years at an annualised 2% from 2012 to 2016,’ he added.
It is the lack of supply that is doubtless the reason that commercial property prices have remained high, but with new developments in London due to be completed by 2013 what does the future hold for the price of commercial property? Watch this space.