Leading forecasters are predicting the continued recovery of UK commercial property values in the new year. The IPD index shows a remarkable rebound, and total returns may even become positive after the largest monthly rise ever in the history of the index in November of 2.4%.
The market rally since August has caused considerable uncertainty for the year ahead, particularly as it has defied fundamental reasons for price restraint such as flagging occupier demand and rental declines.
However, while few expect prices to rise at the same pace, many forecast that next year will be positive for returns from property. The consensus view is broadly that capital values will plateau, with total returns settling at 6 to 10% for the next two years. There is a range of other opinion, however.
William Hill, head of property at Schroders, forecast that the sharp turnround in the performance of UK commercial property would continue through the first six months of 2010. After that, however, he said that the picture was less clear, with economic uncertainty meaning that the market was likely to experience further volatility over the next two to three years and potentially a fall in values in 2011.
Harm Meijer, an analyst at JPMorgan, expects property prices to bounce by 15% between June 2009 to June 2010, before settling into sluggish growth or a modest decline for two years. This will give a compound price growth of 4% a year over a five-year period. He said that the rally in real estate stocks was over, but that there was expected to be a 12% total return from the European listed sector next year. His picks in the UK were Big Yellow and British Land.
CB Richard Ellis, the property consultancy, also believes the market is not in the grip of an unsustainable "mini-bubble", saying that many measures of yield and value were still in comfortable territory relative to long-run averages. The UK, it forecast, looked likely to lead other markets in its recovery.
There is expected to be about €60billion (£55billion) of investment activity in the European commercial real estate market in 2009, about half of the total from the previous year. CBRE expects there to be a steady rise in activity in 2010, although this will be restrained by the focus on prime property, which is in relatively short supply.
Leasing activity in 2009 is likely to be at about a third of 2008 levels, but CBRE expects this also gradually to recover as economic prospects improve during the latter half of 2010.
King Sturge, a rival property agency, forecast that the UK investment bubble would soften in the first quarter. It said prime property had shown growth of 20% in values in the past year, but the impact of an end to quantitative easing, higher tax rates, election uncertainty, unemployment, the Dubai crash and better savings rates would take the steam out of the market.
"Whether it is a VW, or a 'corrugated' recovery, it is not a straight line up from here," said Neville Pritchard, head of UK investment at King Sturge, echoing the sentiment from many veteran investors such as Nick Leslau and Mike Slade .
Secondary stock will continue to languish, he added. "Those who anticipate a substantial rebound in poorer quality stock are mistaken." He said central London offices and the best quality retail parks would continue to find favour with risk-averse investors.
Savills, the real estate adviser, also said that the London market was set to fare well. In a report published alongside Oxford Economics, the economic forecaster, Savills said that London would re-emerge as the fastest growing large European destination and one of the fastest expanding global financial centres, exceeding New York and Tokyo in the medium term.
John Rigg, head of international investment at Savills, said: "Concerted central bank action and the fall in sterling combined with London's intrinsic attractions are causing a rapid recovery to certain markets."
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