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View the article online at http://citywire.co.uk/wealth-manager/article/a546903

UK commercial property sector at a standstill

by Alex Plough on Nov 29, 2011 at 11:12

UK commercial property sector at a standstill

This week the government agreed to underwrite hundreds of millions of pounds in mortgages on new build homes to resuscitate the UK housing market.

But the latest data compiled by Investment Property Databank (IPD) shows that the UK commercial property sector could also be in need of a lifeline.

According to the IPD UK monthly index, capital growth in the UK commercial sector has ground to a standstill. Total returns for October stood at just 0.6% and were almost entirely income driven, the data shows.

Perhaps most worrying is the slowdown in central London office space, which saw capital growth slow to 0.4% and rental values cooling for the first time in over six months.

Phil Tily, IPD UK and Ireland managing director, said: ‘Central London retail and office values have been driving returns since the recovery began. However, in the last few months there have been increasing concerns over a pricing bubble in the capital, which the European economy could further exacerbate.'

Investors have been faced with a barrage of negative indicators over the past three months. One of the main concerns for the UK outlook is that the full impact of public sector cuts has yet to be felt.

Flat index

The European debt crisis is another main driver of sentiment, according to Greg Mansell, research manager at IPD, who said that one of the most telling measures is the European Sentiment Indicator (ESI).

The index, which is produced by the European commission and covers representatives of the manufacturing, services, retail trade and construction sectors, as well as consumers, remained broadly flat in October.

Earlier in the year, many investors were hoping that increasing demand in the secondary commercial market, anything other than prime London assets, would drive sentiment up as the UK headed out of recession.

‘In Q2, we noticed a lot of people starting to invest in the secondary commercial office market for added value, but then in Q3 we saw that confidence diminish. Now there only seems to be appetite for the prime London locations,’ said Mansell.

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1 comment so far. Why not have your say?

Pramatist

Nov 29, 2011 at 12:42

Not sure why flat capital returns = lifeline required. The market yields just over 6% - in line with historical average and certainly not bad relative to bonds. Sure, downside risks exist over the economy but property wouldn't be alone there by any means. Returns have also been pretty robust over the last two years, given the volatile markets we've seen elsewhere. Further out, lack of new development surely means that when the economy starts to get back on its feet again and tenant demand picks up, there could well be a favourable tailwind to returns from the probable lack of supply. Ballast in a stormy sea?

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