UK rental growth to stave off property downturn – study

Rental growth in the UK’s commercial real estate market will stave off a downturn, according to Capital Economics.

In its latest UK Commercial Property Focus, analyst Ed Stansfield says an “encouraging outlook” for rental values is helping allay fears of a downturn.

“We find it hard to see what will trigger a premature end to the current commercial property upswing,” Stansfield says.

A comparison with previous upswings, the report says, suggests that commercial property capital values will peak within the next six months. However, property is not obviously overvalued, while occupier fundamentals are both strong and improving.

”So unless a major shock were to tip the economy back into recession or policymakers are about to implement a significant shift in monetary policy, we suspect that this time, things really will be different,” Stansfield says.

In February, rental value growth and yield compression lifted all-property capital values by 0.2% month on month, Capital Economics said.

”The significance of this is that for most of the past two years, capital value growth has been driven almost exclusively by falling yields,” Stansfield said. “The data suggest that the upswing is maturing, or entering a second phase in which rents start to deliver the growth anticipated by investors.”

In 2011, the euro-zone debt crisis put a huge dent in business and consumer sentiment, pushing the nascent recovery in occupier demand into reverse.

In 1994 and in 2007, investors were wrong-footed by the timing and scale of interest rate rises. On both occasions, the accompanying spike in risk-free rates rapidly left property looking hopelessly overvalued.

The recovery has far stronger foundations than in 2011, the report says, with occupier demand and rental values more resilient.