UK - The UK commercial real estate market will not stabilise until the latter part of 2009 but should begin to recover in 2010 according to Schroder Property.
A research report on the long-term prospects for UK commercial property said the recovery could gather pace in 2010 if the economic recession is alleviated by interest rate cuts.
Mark Callender, head of property research for Schroders, said: "The main factor which is likely to draw institutional buyers back into the market is the increasingly attractive pricing of property relative to other assets. Schroders believes that the rise in yields since mid-2007 has already restored property to fair value relative to bonds, index-linked and cash."
A survey conducted in June 2008 by the UK's Pensions Management Institute in asscociation with Prundential Property Investment Managers (PRUPIM) found that, despite the credit crunch, pension funds still considered property an attractive asset class.
"Indeed, 25% of those pension funds surveyed said they were looking to increase their allocation to property over the next three years, against 8% who were looking to cut their exposure," said Callender.
The report suggested that a flood of foreign investors, encouraged by the fall of sterling against other major currencies, may also help revive Britain's commercial real estate market.
According to Callender, the income return in 2010 will have risen to 7-7.5% and therefore, even without income and capital value growth, property should be able to deliver the target returns set by investors.
Between 2010 and 2011 Schroders, which as of September 2008 has over £114.7bn (€135.3) in assets under management, predicts property yields could start to decline and lift capital values.
The short-term outlook for the UK's commercial property market is much bleaker, as supported by the latest IPD figures that show UK commercial capital values fell by record levels in October.
"Schroders forecasts that total returns from UK property in 2008 will be around -15 to -20%. Adjusted for inflation, 2008 is likely to be the worst year for the UK commercial property market since 1974 when the total returns sank to -27%," said Callender.
Yields rising by 1.25-1.50% have led to a fall in capital values of commercial property and have been made worse by the global financial crisis, says Callender.
"Firstly, it has meant that banks have adopted much stricter lending policies and while debt is still obtainable, the cost has increased sharply as banks have re-introduced arrangement fees and margins have doubled."
"Secondly, the financial crisis has tipped the UK economy into recession and that has put further upward pressure on property yields, as investors have downgraded their expectations for future rental growth and income growth," he added.