Secondary capital values on the slide – DTZ
In its most recent research into the UK commercial property market, DTZ has been looking at values for secondary property and has noted that they are falling more sharply than for prime property in all sectors. Since Q2 2007, secondary property values initially fell more heavily than for prime, and for a longer time. They then recovered less value and are now in steeper decline again, DTZ says. This is the case for all IPD sectors, it notes.
Prime capital values have been following similar paths across the various sectors during the past five years, DTZ says, with movements determined by yields as investors’ attitudes “during this particularly risk-averse period” have been similar towards all assets. But for secondary property, markets have been more variable.
DTZ says that capital values for secondary industrial property regained almost no ground between mid-2009 and late 2009, in contrast to other IPD sectors and grades. This was the result of smaller yield compression during the period, indicating that investors were wary of secondary industrial property. At the moment, secondary retail property is deteriorating most rapidly, particularly secondary shopping centres. These have been struggling with greater rental declines as a result of administrations or retailer rationalisation programmes, the firm notes.
While prime office space outside London is holding its value reasonably well thanks to the sharp drop in development activity since 2008, values for secondary offices are falling steadily, DTZ says, as investors seek higher yields in response to poor occupier demand.
DTZ says that the current declines in capital values across all sectors are forecast to erode the 2012 annual All Property total return to nearly zero. It expects that further falls next year will also cut the 2013 total return to “well below the long-term average”. Annual total returns beyond that should be around 7%-8%, the firm says, with most of this attributable to income return.
