Capital Economics has issued a revised forecast for UK commercial property saying it expects IPD capital values to climb 10% this year and total returns to reach 18%.
It says this is in light of the “sheer momentum in the market and the fact that property is starting from a point where it looks slightly cheap”.
However, it added that subsequent years beyond 2010 may not be as bullish with lenders remaining under pressure to reduce their exposure to property from its current record-high level.
Analyst Ed Stansfield said he also expected GDP growth to be below trend both this year and next and the labour market correction was not over yet.
“This suggests that property occupier market prospects remain weak. Indeed, we expect IPD all-property rental values to decline by 3% in 2010, before rising only moderately (by 1% or so) in 2011.”
Stansfield adds the major risk to the new forecasts is the tightening in monetary policy that will come “at some point”.
However, for now, Capital Economics does not expect interest rates to rise until 2012 at the earliest.
“However, the limited scope for rental uplift over the next few years suggests that commercial property prices will be vulnerable to renewed falls at the point at which rates do eventually start to rise,” said Stansfield.
For the full Capital Economics report, click here. UK Commercial Property Analyst (Q1 2010).pdf