RICS forecasts total fall in UK capital values of 50%

UK commercial real estate capital values could decline by 50% over the life cycle of the current downturn, the Royal Institute of Chartered Surveyors (RICS) has warned. RICS bases the forecast on its assessment that capital values could decline by 16% in 2009 with a further drop of up to 10% in 2010 due to sharp drops in rents. Capital values of comemrcial real estate in the UK have already fallen 25% since the onset of the credit crunch in June 2007.

With further falls almost inevitable in 2009-2010 the cumulative downturn in prices will exceed the downturns experienced in both the 1970's and 1990's. RICS said in its latest report that rising defaults and credit spreads will constrain a near-term recovery in financing, preventing any recovery in the investment market over the next couple of years. But low interest rates, recovering global growth and improving valuations relative to other asset classes should see the downturn gradually begin to reverse on 2011.

The report suggests that the biggest declines are likely in the office sector with capital values expected to drop a further 30-35%, resulting in peak-to-trough declines in excess of 60%. Employment in banking, finance and insurance has accounted for the lion's share of job creation since the millennium although it has moved into decline over the past year. 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.

RICS said that price declines will be exaggerated by falling rents and an increase in distressed selling as refinancing pressures bite.