Recently in IPD figures Category

Research firm Capital Economics has released its latest roundup on the UK commercial property market for the past month.
Analyst Kelvin Davidson makes the following key points:

• The economy remains subdued, with the public finances in a poor state, retail sales declining sharply in January and unemployment rising again. All of this simply reinforces our view that GDP will grow by just 1% this year, with inflation falling from around the middle of 2010 and the recent rises in bond yields also likely to be reversed.
• Market intelligence over the past month showed that respondents to the latest REITA survey expect the current downturn in rental values to continue, albeit for a shorter period than in the early 1990s. Continued rises in retail availability support that view. Admittedly, one bright spot is that office takeup, especially in Central London, has begun to improve.
• The IPD Monthly Index showed that rental values fell further in January, though the monthly decline (0.2%) was the smallest since September 2008. Indeed, consistent with strong take-up, City and West End office rental values actually increased in January. Central London office rental values are set to rise further, but we still expect the IPD all-property average to fall by about 3% this year.
• The investment market upturn continued in January, albeit at a slower pace. IPD initial yields declined by 8bps (from slightly above 7% to slightly below), a smaller fall than the average of 20bps in each of the previous four months. The fading rally in real estate equity prices supports our view that the rebound in IPD capital values will have broadly ground to a halt by the middle of 2010.
• Propertydata.com figures showed that investment market activity declined sharply in January, from £4.3bn in December to £1.1bn. However, part of that decline was due simply to normal seasonal influences. Indeed, in our view, transactions activity is more likely to be strong than weak in the coming months, as institutions spend the large capital inflows that they have received from retail investors.

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

Knight Frank's head of commercial research, Claire Higgins, has released another edition of the monthly UK Market Outlook report.
In it, she highlights the issue of yields and investments and which segments of the market are winning.

Higgins says:
􀂃 A key theme of recent investment activity has been the quest for prime property, with a gradual spread to better quality secondary as the best assets prove either unavailable or the subject of very intense competition.
􀂃 Little decent information is available on poorer quality properties, but IPD's quarterly index helpfully provides some analysis broken down into quartiles by yield.
􀂃 Thus we're able to look at how yields have moved over the course of 2009 for the 25% of properties with the lowest yield, set against the 25% with the highest yield. It's not a perfect proxy for the good versus the ugly, but it's a start.
􀂃 IPD's research shows the better class properties have seen yields chased down notably across the board. With only the sad exception of shopping centres (which, given the lot sizes, is a sector to have suffered more than most from restrictive finances), all segments saw yields improve in their top quartile of properties.
􀂃 In particular, this was true for Standard Retail, Retail Warehouses and Central London offices. Indeed, the latter two of these were the only segments also to see yield improvement among their worst properties.
􀂃 Interesting, then, that Central London offices should, according to IPD, also be the
segment that saw the highest level of net disinvestment during 2009.
􀂃 In H1 09, disinvestment was across the board, but H2 tells a different story as the retail and industrial sectors start to see net purchases as activity restarted. Not so offices, and notably not so for Central London.
􀂃 The conundrum of significantly improving yields but dramatic disinvestment implies buyers outside of IPD, most likely overseas. How will we continue to benchmark a segment for which the best properties are no longer in our index?

Higgins adds that while the UK is now out of recession - just - there remains a significant amount of caution about the economy.
"Property provided a positive return last year, the economy is growing (just) and if
you work in the Central London market you're probably wondering why no one's
opened the champagne yet.
"I'm not going to end with my usual note of caution. Instead, let's just enjoy the moment."

Aberdeen Property Investors expects UK commercial property to undergo a two-stage recovery in total returns in the coming two years.
The company released its latest UK Property Snapshot today, saying the recovery will be reminiscent of the mid-1990s with an initial surge driven by the investment market, followed by a rental market-driven improvement.
"We expect 2010 to be a very strong year for performance, as yields continue to
fall sharply in the first half of the year, despite rents continuing to decline, albeit more
slowly," says Aberdeen.
"Investment demand from UK pension funds, the retail funds, private UK investors,
overseas investors, REITs and property companies is expected to continue rising over
the next few months, leading to increasingly competitive bidding which will drive up
capital values further."
But, beyond a strong total return performance in 2010, Aberdeen is predicting returns to "drop back sharply" in 2011 as interest rates and bond yields rebound, while rental growth struggles to resume.

Capital Economics has released its monthly view on the property sector saying it expects the economic recovery will remain slow, undermining rental values.
Among the key points, the research firm says:

• The economy emerged from recession in Q4, but the 0.1% increase in GDP was well below expectations. We expect conditions in the labour market to deteriorate again and GDP growth to remain below trend this year. Accordingly, official interest rates are likely to remain unchanged throughout 2010, with recent rises in inflation and bond yields set to be reversed.
• Market intelligence over the past month showed that net property lending flows remain very low and the availability of credit is unlikely to increase materially for some time yet. Other data showed that office take-up in Central London continues to improve strongly, while occupier demand conditions in the retail sector remain soft.
• The IPD Monthly Index showed a further fall in rental values in December, with all three main sectors contributing to the decline. Although the rate of decline in rental values has slowed in recent months, a generally subdued economy and renewed falls in employment mean that they are likely to drop further this year.
• For now, however, the recovery in the investment market remains rapid. IPD initial yields fell from 7.3% in November to 7% in December, and capital values rose by 3%. That was the biggest gain in the 23-year history of the IPD Monthly index. The rally in real estate equities, however, appears to have lost a little steam of late, supporting our view that the rebound in capital values is likely to have lost momentum by the middle of the year.
• Propertydata.com figures showed that investment market activity increased strongly in December, from £2bn in November to £3.4bn. Over Q4 as a whole, UK institutions made their first net purchase of property since Q2 2007, and continued strong inflows into retail funds suggest that institutions are set to remain net buyers over the coming quarters.

F&C REIT has released its first Market Review & Outlook for 2010.
The review is a quarterly property and economic overview of the preceding quarter and a look ahead to the coming quarter.
In summary, F&C says:

 The property market has seen a dramatic turnaround from mid 2009 to give a
2.2% total return for the full year. The recovery gained pace during the year
and the December IPD Monthly total return was a record 3.6%.

 The recovery has been investment led and yields have moved in sharply,
especially at the prime end.

 There is concern that the improvement may not be sustainable due to
weakness in the occupational market, a narrowing yield gap against the risk
free rate, increased supply of investment stock and in the light of prospective
tightening in economic policy.

 Momentum is likely to ensure a strong start to 2010 but there could be a
slowdown in the latter part of 2010 before a pick up in rental growth
enhances returns later in the forecast period.

 The outlook is highly uncertain with risks to the downside if the economic
situation deteriorates and yields move out but upside potential if growth is
stronger than forecast and filters through to higher rental growth.

 With investors focused on security of income, prime property is expected to
out-perform.

 Property benefits from an income return of more than 8% and this will help
deliver double digit annualised total returns over the medium-term.

The divergence between the investor market and the occupier market is expected to continue into 2010, according to Capital Economics.
The research firm said recent data had highlight that while European investment volumes rose in Q4 2009, rental values, fell.
Figures from JLL show that European commercial property investment rose to €25bn in Q4.
Capital Economics continues:
• According to CBRE, the increase in investment market activity was accompanied by modest declines in office yields in several Western European markets. This suggests that renewed investor interest in France and the UK earlier in the year is spreading to other markets.

The IPD Monthly Index is released today at 3pm. All eyes will be keenly watching the increase in UK commercial capital values after figures earlier this week from CBRE reported a record 3.3% rise in December.

Retail warehouses performed best, with values increasing 6.1% in the month.

JPMorgan analyst Harm Meijer said : "If the IPD index for December were to be similar to the CBRE gain, it would indicate that commercial real estate values have bounced by 9% from their downturn low and 7.7% over the last quarter of 2009.

"The CBRE index itself indicated a jump of 10.3%. We have a 12 month (Jun'09 - Jun'10) capital growth estimate of +15%, and 1Q10 estimate of c. +5%, and do not yet see a reason to upgrade our view."

Knight Frank's head of commercial research, Claire Higgins, has published her latest thoughts on the UK market outlook in her monthly commercial property review.
In it, she highlights November's IPD figures, which showed the biggest monthly rise in capital values for 15 years - at 2.36%.
"Perhaps even more intriguing was the reduction in the rate of decline in rental
values," she says.
"By which I mean they still went down, but not as much. This is somewhat counterintuitive in a recessionary market which lags unemployment trends, where you'd expect all things occupational to be getting worse, not better. It feels like a monthly blip to me, but perhaps December will have proved me wrong."

On the UK investment market volumes, Higgins says:

􀂃 The average quarterly volume of investment transactions in the last decade has been £8.8bn, according to Property Data.
􀂃 Admittedly, the last decade has seen some pretty turbulent levels of activity, ranging from a peak of £17.7bn in the last quarter of 2006 to a low of just £3.9bn in the first quarter of 2009.

More than two thirds of UK property disposals last year were sold at prices below their valuations, according to the IPD/RICS Valuation and Sale Price Study 2009.

The study was published yesterday at the annual IPD/IPF Property Investment Conference in Brighton.

Rebecca Graham, senior analyst at IPD told delegates at the pre-conference briefing on property valuation accuracy that by contrast the three other major European markets in the study - France, Netherlands and Germany - all achieved a sale premium to valuation.

For more news from the IPD/IPF conference, check out the conference blog here.