More of a marathon than a sprint – IPD
The Olympics delivered a one-off boost to the UK’s GDP in the third quarter this year, but the IPD says the recovery for the commercial property sector will be more of a marathon than a sprint. Phil Tily, IPD UK and Ireland managing director, says: “Developments remain at a low ebb, bank re-financing is in limited supply and tenant retention is a key concern for investors outside of London”.
Capital values for UK property fell a further 0.8% in the three months to September, according to the IPD UK Quarterly Property Index. Values have now declined for a full year. The fall comes despite the GDP figures indicating a return to growth for the UK economy in Q3, but it does represent a slowing rate of decline after a 1.0% fall in Q2.
The IPD says investor sentiment was the main driver of the quarterly decline – investors are still wary about lacklustre demand from tenants and the effects of the stalling austerity cuts outside London. Rental values – a measure of tenant demand – have remained relatively flat at headline level, the IPD says, but demand outside the South East is fickle and has contributed to the falling values.
Headline falls in capital values in this “second dip” have amounted to 2.6%, the IPD says, and have reached well over 5% in the regional office and retail segments. Values for retail property and office space outside the South East have fallen by more than 8% over the past year. In-town shopping centre values have fallen 6.8% over the period, while out-of-town retail centre values have remained flat. High-street retail values have fallen by 3.4% outside the South East. Regional office values fell the furthest in the North East and Yorkshire & Humberside areas, with both seeing declines of more than 3%.
Meanwhile, the value of retail property in Central London has risen 6.2% over the past 12 months, while West End office space has recorded an increase of 5% and values for offices in the City rose 0.7%.
The IPD UK Quarterly Property Index notes that investors and landlords have been making efforts to secure income streams and as a result total returns have not fallen into negative territory – they actually strengthened slightly to 0.7% in Q3. However, the occupier market remains difficult, against a backdrop of lease lengths falling to a third of their 1990s levels.
“The industry is not sitting still,” says Phil Tily, “and it is exploring alternative investments that help diversify returns”. “And while conditions may be difficult, there are increasing opportunities through selective asset management plays, towards properties that offer upsides when leases are successfully renegotiated.”
“It is a difficult market, but it presents opportunities,” he concluded.
