Value declines become more shallow, says IPD

Capital values continue to decline in UK commercial property markets but June saw the shallowest fall since August 2007, at -0.9%, according to the IPD UK Monthly Index. The all property peak-to-trough decline now stands at -44.1%, while the 12-month change in capital values is -30.8%.

The IPD said that over this two-year period, the nature of the property recession has shifted from a yield-driven downturn - all property initial yields have moved out form 4.6% to 7.9% - to a deepening negative rental cycle, particularly over the six months to the end of June 2009.

Yield impact, which measures the influence yield movements have on capital values, has followed a correlated ‘double-dip’ pattern, aligned with the two distinct financial market shocks. At the end of June, the yield impact had retreated to just -0.19% - the smallest monthly figure over the two-year period.

By contrast, the UK rental value cycle continues to deteriorate and fell -0.9% in June. The deterioration has picked up momentum since last autumn caused by rising City and West End office vacancies as well as the collapse into administration of Woolworth's and MFI in the retail sector.

Capital value movements at sector level were diluted most significantly in the retail sector, at -0.7% last month compared with May's 1.6% decline, with 0.8% and 1.2% declines in the industrial and office sectors respectively. Income returns, which increase if capital values fall faster than rental income, rose again marginally to 0.69%.

Over the two-year cycle commercial property has returned -36.7% compared to equities’ -28.5%, as measured by the FTSE All-Share Index. Bonds, by contrast, have delivered investors positive returns of 23.5% over the two years to end of June 2009.

Ian Cullen, co-founding director at IPD said: 'June marked the second anniversary of continuously falling commercial property values in a uniquely painful way - by being the first month in 24 in which falling occupier demand, rather than investor diffidence, played the lead role in driving capital decline.'