Real Return - February 2009 issue (to return to the Newsletter please close this window)
2008 - UK property's worst year on record – and Ireland falls even faster by Tim Horsey UK commercial property's total return of -22.1% for the year 2008, as recorded by the IPD UK Quarterly Index, was the worst ever result in nominal terms since comparable records began in 1921. Meanwhile in Ireland the SCS-IPD Quarterly Index registered and even more dramatic return of -34.2% for the year. These extremely weak levels of performance resulted from big falls in property values, with capital growth of -26.4% recorded in the UK and -37.2% in Ireland. UK capital values have now fallen by 34.3% since July 2007, when the peak of the preceding boom period was reached. All of the gains in value which resulted from five and a half years of quarterly capital value rises since 2002 have been reversed in the last 18 months, and values are now broadly in line with their December 2001 levels. This story of boom and bust had been driven almost entirely by equivalent yields rather than by changes in rental levels, which have followed a much less dramatic path. The five year boom now looks like an investment bubble, and now that the bubble has burst it is difficult to gauge when some kind of equilibrium will be restored. Malcolm Frodsham, IPD Research Director is relatively optimistic. “The last 12 months has set a number of unwanted records in real estate returns,” he says, “with the worst ever year capping the worst ever month and worst ever quarter in IPD history. Such has been the severity of the falls in values that on a pure comparison basis the UK market now looks attractively priced, but whether this matters or not to investors depends on an easing in the financial situation.” Swings in rental values, the traditional drivers of the UK property cycle, have been much less evident in this boom and bust than they were in the late 1980s and early 1990s. While capital values fell by more than a quarter last year, market rents just edged downwards by 1.1% for the country as a whole, even if City and West End offices were somewhat harder hit.
In Ireland the disconnect between the investment and occupational markets was even more evident, with overall rental values actually rising by 2% through 2008. This kind of pattern was seen most dramatically in the retail sector, where yields reduced values by 45% while market rents marginally offset this, increasing by 3.4%. The rise in investment yields in both the UK and Ireland in 2008 has been indiscriminate in terms of both sectors and geographical regions. Levels in UK investment market activity fell away substantially at the end of 2007, and have
not recovered since then, and overseas investment in particular has plunged. This has been accompanied by a virtual freeze on bank lending to UK commercial property, particularly on larger lot sizes, which has led to the market in these assets all but drying up. It now seems likely, given the contraction taking place in the real economy and the falls in market rents that are taking place in most UK property sectors, that the occupier market will now begin to have an increasingly negative impact on values and overall returns. This pattern has some similarities with that seen in the last major downturn in UK property markets, which began in 1989. Then too yields began to move out while rents were still rising, reflecting a change in investor sentiment, but on that occasion the previous boom had been driven much more by rising rents – there had been no comparable ‘wall of money’ pushing the market ahead. So there was not the major re-pricing of property as an investment asset which took place in the early 2000s. Given that rents only rose quite slowly through the latest boom period, by no more than 15% from trough to peak across the UK market as a whole, it may be hoped that the downside risk for returns is also likely to be less violent than the impact of yields is proving to be. But in this regard much will depend on the eventual length and severity of the UK economic downturn – which could well eclipse the experience of the 1990s.
to view the latest IPD Index results, as well as a timetable with upcoming Index release dates.
Click here
Please contact the editor Tim Horsey if you would like to comment