UK recovery slows to a crawl, says IPD

UK - Investors in the UK commercial real estate market are hoping for an end to the recent period of extreme volatility, which saw capital values fall by 44.2% in the two years following the credit crunch, before recovering by 15.2% over the 11 months to June 2010.
 
The latest monthly numbers from Investment Property Databank (IPD) show capital growth in June stagnated at 0.5% for the second month in a row, meaning a total capital appreciation of 1.9% for the whole of the second quarter.
 
This represents the slowest quarterly growth since the third quarter of 2009, when the market rebound in the UK began.
 
Real estate values are now back to their December 2008 levels, but the pricing volatility experienced during the intervening period appeared to be divorced from movements in the underlying rental market.
 
IPD said yields and rents both aligned to exert downward pressure on capital values over the 15 months from May 2008 until yield compression returned last July.
 
Over the subsequent 12 months, yields compressed by 175 basis points, with capital appreciation tempered by a 3.1% fall in rental values over the period.
 
Phil Tily, newly appointed managing director for the UK and Ireland at IPD, said: "This property cycle brings into sharp focus the power of sentiment in driving the direction of commercial property values.
 
"Over the second quarter of this year, the influences of yield and rents have softened, delivering much more temperate capital values movements in recent months."
 
He added: "After a volatile three years, the fundamentals driving property markets are finally appearing to be moderating.
 
"Whether this proves to be the calm after a very long storm, of course, depends upon the course of the domestic economy and the impact that will have on both domestic and overseas investor confidence.
 
"Should capital growth reverse, the focus will turn to how to stimulate a long-term, sustainable rental recovery, as income is the long-term driver of commercial property returns for investors."
 
Total returns for the second quarter were 1% when taking into account income and capital appreciation, according to IPD, and Invista Real Estate Investment Management expects returns to remain modest going forward.
 
The fund manager's latest research found employment was expected to continue to fall over the next 12 months, resulting in continuing weak occupational demand and falling rents in most UK sectors.
 
Jeremy Marsh, senior property analyst at Invista, said: "UK commercial property market returns are set to ease in the coming 12 months, but we are unlikely to see as dramatic a slowdown as we did in the mid-1990s.
 
"Although market rental value growth is expected to be anaemic at best, the historically high margin between property and government bond yields should protect performance in the short to medium term.
 
"Nevertheless, the risk is almost all on the downside, with the possibility of sharp rises in government bond yields the most significant threat."