UK - The entire capital growth made over the last six years in the UK commercial real estate market has been eroded in only 18 months, according to the IPD UK Quarterly Property Index Q4 2008 published this week.
The spike in yield movements caused by the second phase of the banking crisis was largely to blame for the property market downturn and all-time record declines in capital values and returns for UK commercial property investment. Capital values fell by -14.4% over the fourth quarter, contributing to an annual decline of -26.4% for 2008, while returns fell by 13.0% in the last quarter and 22.1% over the year.
Malcolm Frodsham, research director at IPD, said: "The last 12 months has set a number of unwanted records in the real estate returns with the worst ever year capping the worst ever month and worst quarter in IPD history. Such has been the severity of the falls in values that on a pure comparison basis the UK market now looks attractively priced, whether this matters or not to investors depends on an easing in the financial situation."
The property cycle has had few swings in rental peaks and troughs and has experienced very mild rental growth. All property rental values fell by 1.4% over Q4 and by 1.1% over the year. City and West End London offices fell by 3.9% and 8.4% respectively.
Retail warehousing and the City London office markets were the hardest hit markets due to the outward movement in yields, collapse in investor confidence and falling rents.
In the 18 months to December 2008, overall yields increased every quarter while capital values kept falling. Towards the end of 2008, initial yields moved out in retail, offices and industrials by 6.8%, 6.7% and 7.6% respectively. Over the year, retail delivered a capital growth of -27.0%, offices delivered -26.5% and industrials -25.7%.
Ross Walker, an economist for the Royal Bank of Scotland Group told the audience at the IPD UK Annual Results launch in Westminster, London that the property sector is experiencing a "deeper and more synchronised recession" than previously seen, affecting both developed and emerging markets.
"I think the next thing to blow up will be the emerging markets. It's been an uneven process and there have been countries that have been highly vulnerable, Hungary for example, in that there has been a huge amount of borrowing and locally their currency is getting battered," he said.
According to Walker, China and India are also seeing a significant slowdown, while the UK and US are expected to be the first markets to recover.
Any recovery will take time, however, as unemployment is set to rise above three million people by this time next year and GDP is expected to fall by 2.4% in 2009 - the worst drop since 1980-81. There are also concerns over rising repossessions in the residential property markets, the lack of credit supply and a retrenchment in the corporate sector.
"I expect there to be a fairly sluggish recovery during 2010. Its not until 2011 that I expect we'll see a starting recovery trend, " said Walker.
Richard Jones, from Aviva, thinks the evolving banking crisis in 2009 will encourage investors to look at different ways of investing, for example buying via vehicles.
"I think we have to see credit loosening. We are talking to people that would like to buy but they can't get the debt. People are beginning to get a lot more creative," he said.
The IPD UK Quarterly Property Index databank had a total capital value of £7.7bn (€8.6bn) at the end of December 2008 and included 869 properties.
In addition, IPD also announced last week the appointment of Javi Venter as director of the US office and Goran Ujdur as a director within the Australian and New Zealand office, as part of their global development.
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