Prime property shortages ahead – GVA
GVA expects shortages of prime property to become an increasing feature in the UK market, despite the slow nature of the economic upturn. Development levels were already low before the recession and are unlikely to increase quickly, given the continued poor viability of many markets and the difficulty of securing funding, the firm notes in its market review for Q3 2011.
GVA notes that in Central London there is already an increase in expansionary requirements for office space, and some pre-letting activity – as availability continues to decrease in the capital and very little development is due to complete in 2011 or 2012, prime headline rental values will undoubtedly rise further, it adds.
The firm is forecasting a levelling-off of average rental values for commercial property excluding Central London this year, with overall growth of just 1.0% expected, followed by a “very modest” rise of 2.2% in 2012. After this point, the firm says growth should speed up as supply shortages begin to emerge, but it still only expects growth of 3.2% per annum by 2015.
Looking at the investment market, GVA says that the gap between property yields and gilt yields, which widened further in Q2, should narrow steadily next year and beyond as gilt yields rise in line with economic recovery and higher interest rates while no significant movement in commercial property yields is forecast. The firm expects All Property capital values to rise by a modest 1.5% this year and 0.8% in 2012, but notes that most of this will be driven by Central London offices – elsewhere it expects mostly stable capital values. “Beyond 2012, the expected modest acceleration in rental growth should mean capital value growth rising to more than 3% pa by 2014,” it adds.
Taking GVA’s income and capital growth forecasts together, the firm arrives at forecast All Property total returns of 7.6% for 2011, dipping to 6.9% in 2012 and then rising to 8.9% in 2013, 9.8% in 2014 and 9.0% in 2015. It points out that there are of course many risks to this forecast and that investments will perform very differently according to sector, region and quality of property. This last factor may be the most important, it notes – for more secondary and tertiary property, investors will remain concerned about void rates, the weaker covenant strength of typical occupiers and “the challenge of re-letting buildings in an era of ever shorter leases”. GVA says that while this is inevitable at this stage in the economic cycle, “it is in this part of the market where there is the potential for an increase in supply, through distressed assets and in particular those held by the state-owned banks and NAMA”.
