Capital values stabilising in UK market

After two years of dramatic decline, capital values are now stabilising for UK property, according to the UK Quarterly Snapshot from Aberdeen Property Investors. Investor demand is returning, aided by sterling's fall over the past year, the report said.

The high income return now available from UK property relative to other asset classes also looks very attractive, despite continuing falls in rental values. Yields on some prime properties are now falling again for the first time in over two years. Secondary property values have continued to decline, but much more slowly than was experienced earlier in the year.

In the occupier market, the pace of rental decline has begun to show signs of stabilising. Rents are currently falling by an annualised 9% and 6% respectively in the retail and industrial sectors. The office sector is experiencing a sharper pace of decline, at an annualised 15%, although this is down from the 20% seen last quarter.

Aberdeen attributed the stabilisation of yields to the fact that there has not been the flood of investment stock onto the market that many commentators feared at the start of 2009. Property companies and REITS have raised over EUR 3 bn over the past six months via new share issues, the report pointed out, adding that this has reduced the need for them to sell property. 'Institutional investors are now reluctant to sell at what they perceive as "bottom of market" prices.'

In addition, banks are generally turning a blind eye to loan-to-value covenant breaches on loans where interest costs are well covered, and restructuring and extending the life of these loans. 'They are mostly taking the view that they would only achieve a "fire sale" price if they disposed of the asset, which would force valuations lower again, and compound their problem.'