Capital values set to fall further than 1970s and early 1990s

An acceleration in this trend is set to weigh on demand for office space, undermining rents. The retail market is also likely to suffer a similar fate and see capital values drop by a further 25-30% as consumers tighten their belts. The retail warehouse market is feeling the impact of the downturn and a further slowing of big ticket purchases is expected as transactions in the housing market remain subdued. Capital values declines in the industrial sector are expected to be less pronounced, falling a further 15-20% over the next three years, helped somewhat by a weakening pound and slow recovery in the global economy towards 2011.

Price declines will be exaggerated by falling rents and an increase in distressed selling as refinancing pressures bite. RICS expects rents to fall by 10% in 2009, 4% in 2010 and 3% in 2011. The office sector is expected to be hit hardest with a 16% decline in rents in 2009, 11% in 2010 and 6% in 2011. With consumer confidence at its worst level for over a decade and consumer spending already falling, retail rents will also suffer. RICS expects rents in the retail sector to fall by 7% in 2009, 6% in 2010 before stabilising by 2011.

Rents in the industrial sector will be marginally flatter than elsewhere but even so rents are expected to fall by 6% in 2009, 5% in 2010 before beginning to edge upward by 2011.

RICS senior economist Oliver Gilmartin said: “We are only half way through the price correction in the commercial property market with values set to fall through 2009 and 2010 as rental declines gather pace. Transaction activity is set to rise, however as more sellers become willing to accept lower bid prices.

“On a positive note, the rapid re-pricing across the market has pushed UK yields to among the highest in the developed world with a very wide gap emerging compared to finance costs. For unleveraged investors (like pension funds), high yields provide good long term value especially for prime properties.

“Indeed stimulus plans by central banks worldwide and accelerated fiscal packages, might see a return to higher inflation once the worst of the current slowdown has passed, with property tending to act as a good hedge.”

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