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The value of UK commercial property will have more than halved by the end of the decade as rental demand continues to wane, according to a report out today.
The Royal Institution of Chartered Surveyors (RICS) predicts that the commercial property market will see a fall of at least 16% in capital values in 2009 and up to 10% in 2010. Capital values have already fallen 25% since the onset of the credit crunch in June 2007. This would mean steeper falls than in the recessions of the 1970s and early 1990s.
Oliver Gilmartin, senior economist at RICS, said: "We are only halfway 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."
The report says that rising defaults will prevent a near-term recovery, and the investment market will be sluggish for some time to come.
The biggest declines are likely to be in the office sector, with capital values expected to drop a further 30% to 35%, bringing peak-to-trough declines in excess of 60%. As redundancies and lay-offs spread through the banking, finance and insurance sectors, demand for office space has waned over the past year, undermining rental levels.
The retail market is likely to suffer a similar fate and see capital values drop by a further 25% to 30% as consumers increasingly 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.
The derivatives market for property swaps, which is a good indicator of the direction of capital values in the commercial property sector, paints a similar picture to the RICS.
The IPD all property index shows that capital values have already fallen 28% from their June 2007 peak. The market expects them to bottom out in 2010-11, with a peak-to-trough capital value decline of 51%. This means there is a 32% fall expected in capital values from their current levels.
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