As the year has moved into its second quarter, does the precarious, commercial property market have reason to raise its expectations and look to the future in a positive manner? Well, recent reports offer some cause for optimism.
Commercial property values have been boosted by the latest report released by CBRE, which has shown a marked improvement during March and the strongest overall performance so far in 2011.
At the ‘All Property’ level, figures showed total returns of 1.2% and capital value growth of 0.7%.
For the first time in fourteen months, the Central London offices sector was outperformed by the shopping centre sector, its 1.1% capital growth and total returns of 1.5% were leapfrogged by the shopping centre sector’s 1.5% capital value growth and 2.0% total returns.
Retail warehouses enjoyed a positive month, with capital growth of 0.6% and 1.0% total returns. In contrast, shops came below the All Property benchmark with 0.2% capital growth and 0.7% total returns.
Total returns from the retail sector came in at 1.3% with 0.8% growth. Industrial returns were 0.4% in capital growth with total returns of 1.0%.
There is though, the concerning news that secondary commercial property assets continue to underperform. It has been estimated that the current discount from prime to secondary assets is 40–45%, compared to a regular figure of 15–20%. Lease expiries, tenant failure and a continued shortage of bank finance have been cited as contributory factors.
Commercial property occupier markets are seriously affecting commercial property performance differentials. The All Property figures have shown a continuing weaknesses in most occupier markets.
However, the latest report contains cause for optimism, with David Wylie, CBRE’s Head of UK Economics and Forecasting, observing that ‘improvements in occupier markets are beginning to be seen in a number of sub-markets, notably Central London offices and retail warehouses’. This is ‘helping to drive valuations ahead, reducing the reliance on further yield compression’.
So, despite some positives and March appearing to be the strongest month of the year, this isn’t cause for all out celebration. Concern still remains for commercial property in the UK offices sector outside of London, where values have dropped 0.3% with positive returns at just 0.2%, making the office sector in UK areas, the weakest performing commercial property sub-sector.
In today’s climate, it remains very difficult to make any predictions regarding the future of the commercial property market.
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