The recovery in UK commercial property values since the middle of 2009 has been relatively rapid and impressive at the All Property level, confounding predictions of a prolonged and ongoing downward drift in values, according to a new research report from CB Richard Ellis. However, the continuing gap between prime and secondary yield levels points towards divergent performances across different grades of stock and locations.
The recovery in UK commercial property values since the middle of 2009 has been relatively rapid and impressive at the All Property level, confounding predictions of a prolonged and ongoing downward drift in values, according to a new research report from CB Richard Ellis. However, the continuing gap between prime and secondary yield levels points towards divergent performances across different grades of stock and locations.
An analysis of the CB Richard Ellis Monthly Index shows an uneven recovery in the UK property market. While values at the All Property level increased by 17.8% over the 12 months to June 2010, the headline figures mask considerable variation between sub-sectors, regions and, more especially, different grades of stock. Prime assets have pulled along the wider index, increasing by 26.1% over the past year following strong inflows from foreign buyers and UK institutions, while secondary assets have seen no overall increase during the period.
The prime market recovery has been led by Central London offices and retail warehouses, which saw values rise by 34.4% and 32.0% respectively over the year to June. Both have benefited from the revival of investor interest in prime assets with secure income, in a flight to quality prompted by a risk-averse investment environment. The value of secondary office stock outside of Central London drifted down over the year, falling by between 2.0% and 4.5%. High Street shops have been the most significantly impacted secondary sub-market, with values falling by 12.2% over the year, reflecting the squeeze on the retail sector.
The secondary market that saw the greatest improvement was Central London offices, where values rose by 9.7% over the year, largely propelled by the prospect of renewed rental growth and an emerging squeeze in the availability of new supply. A wider recovery in secondary markets appears to be held back for now by a number of ongoing factors. Foremost among these, are the continuing dearth of debt finance for all but the best quality property and the nervousness of investors over covenant strength and potential tenant default.
'The figures underline the divergent nature of the UK commercial property market recovery,' said David Wylie, head of UK Economics and Forecasting, CBRE. 'The scale of the rebound in prime values is impressive, but the continuing declines in some sub-markets and regions highlights the disparity between rates of returns seen across the property sector.'
