Thrifty Loans

The latest Royal Institution of Chartered Surveyors (RICS) Commercial Property Forecast suggests that positive rental growth will help avoid a hard landing for the commercial property market.

It is expected that commercial property will provide 8% as a return over 2007 as continued economic strength and rising capacity constraints encourage business expansion. In 2008 RICS expect there to be a slowdown to a 5% return, although importantly investor returns will stay positive as they are buoyed by increasing rents.

The recent high profile sale of the Citigroup tower and the HSBC building is not seen by RICS as a forerunner of an imminent market crash.

While the listed property market is showing signs of a distinct downturn in prime commercial property prices looking towards 2008, with average property share trading at a 30% discount to net asset values, RICS is of the opinion that the listed market is being overly pessimistic as only modest declines in capital values are expected next year.

The greatest rental advances are forecast to be seen in the office sector, peaking between 8-9%. The 20+% returns of the late ‘80s are not expected to be repeated. Strength in financial services and increasing global trade continue to ensure that the office sector remains ahead of the retail and industrial markets.

The retail sector is not expected to produce any significant rental returns, with spending in the high street limited, due to interest rate rises and the growth of internet retailing, but there has been some optimism in the retail industry in recent months.

There has been recovery in the Eurozone, supporting the industrial sector, but a strong pound, higher interest rates and higher oil prices have had a negative impact.

RICS senior economist Oliver Gilmartin commented: “Despite the much-trumpeted rise in nominal bond yields during 2007, support for commercial property into 2008 will come from strong economic growth and rising commercial property rents. Stock market volatility during May 2006 and the first half of 2007 highlights the need for diversification within portfolios, with the insatiable appetite from retail investors unlikely to dry up into 2008. The evolution of the market with the growth of property derivatives and REITs will allow commercial property to firmly assert itself as a core asset alongside bonds and equities in the years ahead.”