UK - Commercial property capital values are predicted to fall a further 25% over the next two years, according to the latest forecast issued by the Royal Institution of Chartered Surveyors (RICS).

The RICS' Commercial Property Forecast 2008 predicted subdued tenant demand and declines in rental growth will add downward pressure on capital values, which are expected to see peak-to-trough declines exceed 50% in nominal terms over the next two years.

Between the peak in June 2007 and October 2008 capital values have fallen by nearly 25% (24.5%) and the RICS predicts they will drop a further 16% in 2009 and 10% in 2010.

Oliver Gilmartin, senior economist at RICS, said: "We are only half way through the price correction in the commercial property market with values set to fall through 2009 and 2010 as rental declines gather pace. Transaction activity is set to rise, however, as more sellers become willing to accept lower bid prices."

The biggest decline in capital values is likely to be seen in the office sector, which is predicted to drop 30-35% in nominal terms through 2009 and 2010, making peak-to-trough declines over 60%.

Retail capital values are expected to fall between 25-30% as a result of subdued transaction volumes in the property market.

The industrial sector is predicted to do slightly better, according to RICS, thanks to higher initial yields and lower rental declines, with capital values expected to fall around 15-20%.

The RICS ‘ report said the growing use of Real Estate Investment Trusts (REITs) and derivatives share trades, to try and reduce capital value declines in the direct market, may help reduce forced selling but warned the higher leveraged investors were likely to be forced to sell at distressed sales prices.

RICS has predicted the UK market could outperform other European markets and thinks the declines in sterling against the dollar and euro will make it more attractive to investors than some of its European counterparts.

"On a positive note, the rapid re-pricing across the market has pushed UK yields to among the highest in the developed world with a very wide gap emerging compared to finance costs. For unleveraged investors (like pension funds), high yields provide good long-term vales especially for prime properties," said Gilmartin.

The RICS's latest Global Commercial Property Survey showed several European markets, including Italy and the Republic of Ireland, had weaker rental conditions than the UK.

The investment market is expected to be slow in the UK for some time as a result of rising defaults and credit spreads, however, commercial property values are expected to improve gradually and turn positive by 2011 with the help of lower interest rates and recovering global growth.

The RICS Commercial Property Forecast 2008 uses quantitative models that track the impact of economic variables on rents and capital values and also looks at valuation criteria.

More specifically, the latest predictions are based on data from the association's latest commercial property  survey - which asks its members what they think price movements are - as well as an amalgamation of previous data from elsewhere in the market, according to Simon Rubinsohn, chief economist at RICS.

"The numbers come from us, not the members," he added.

The RICS is a representative body of 86,000 chartered surveyor members and covers all aspects of property, construction and environmental issues.

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