The property investment market is beginning to show signs of life but there are few positives yet in other markets, according to the latest Quarterly Property Market Update from Cluttons.
The outlook for prime investment property is improving as yields begin to stabilise. Well-let property assets with strong covenants can look attractive when set against other income-producing investments.
According to senior partner, Bill Siegle: "While the economy remains fragile, the few crumbs of positive economic data announced recently appear to have persuaded some investors that we have reached the bottom of the cycle.
"These cash-rich investors have begun to return to the market eager to take advantage of some very favourable yields that are on offer on prime properties with secure income streams."
However, while the investment market for well-let prime property begins to revive, so other sectors of the property market remain constrained and the outlook continues to look depressed in the short-term.
In the occupational sector, demand for office space remains subdued, particularly in Central London, where job losses in the financial sector have reverberated throughout the London occupier market.
Consequently rental values have fallen sharply with prime West End down to £75 per sq ft from a high of £120 per sq ft, while Victoria rental values have fallen to circa £50 per sq ft.
But it is the City that has taken the brunt of the falls with prime headline rents having fallen to £42 per sq ft from a high of £85 per sq ft
Further falls in rental values are expected overall during 2009 as the full impact of job losses filters through.
As a result of this, Cluttons expects office rents to fall by -15% in 2009 and by a further -8% in 2010 before beginning to recover. Office investment fell to its lowest quarterly total since PropertyData records began in 2000. The total value of transactions was just over £1billion in the first quarter of 2009.
Siegle said: "There is likely to be another two years of pain to be felt in the occupational market before rents start to turn around.
"This, and the threat of empty premises rates, will put further pressure on landlords to renegotiate rents or risk having costly void periods."
Elsewhere, the retail sector outside London remains difficult as household wealth falls and sales growth weakens.
However, in London, encouraged by the fall in the pound, tourist spend has helped Central London retail sales outperform the rest of the UK, rising like-for-like by 5.8% in the first quarter of 2009 compared with a -0.7% fall for the UK according to the British Retail Consortium.
The manufacturing sector may have put the worst behind it for now following two cautiously upbeat surveys from the CIPS Purchasing Managers and CBI. Up until now the collapse in manufacturing output has been spectacular.
This has resulted in an exceptionally weak occupier market, where falling rents are unlikely to rise before late 2011. Despite this bleak assessment, investors continue to show interest in well located, strong covenant, distribution centres.
Finally, although recent house price data has been encouraging it is difficult to foresee an immediate turning point in the market with the outlook for the UK economy continuing to deteriorate, unemployment on the rise and mortgages restricted.
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