We won’t shop our way out of this double-dip – Knight Frank
Knight Frank says the latest IPD All Property Capital Growth Index, which has again declined, suggests that the long-anticipated double-dip for capital values in commercial property has finally arrived, but that it is following a shallow trajectory. But a shallow dip can quickly turn into a steep decline, it warns – adding that the continuing difficulties in the retail sector will probably exert downwards pressure on the IPD index in coming months.
There has been a long gap between this current dip and the one seen in 2008-2009 – a longer gap, in fact, than some had been predicting. Knight Frank says this partly reflects the severity of the first decline and bodes well for a shallow second dip, “as considerable downside is already priced in”.
The firm has compared the current situation with that in 1994-1996, when a two-year double-dip saw the All Property Capital Value Index fall by 6% from peak to trough. Back then, office space in the City of London led the market into the downturn, with IPD values peaking in April 1994 and then falling 8.5%. Offices in the West End only fell by 0.7% in value – “more of a paddle than a dip”, Knight Frank quips. Retail property in Central London only recorded “the odd month” of falling values during this period and in fact the capital value index for this sector actually rose 13% between July 1994 and July 1996. The figure for the All Retail Warehouses index dipped just 1.7% peak to trough while regional shops were more strongly affected, falling nearly 5.8%.
Knight Frank thinks similarities between the current double-dip and that of 1994-1996 will be superficial. While Central London retail “may well defy gravity as in the mid-1990s,” the firm says, “it would be very surprising if secondary regional retail did not face a tougher double dip this time around”. City offices have already defied the historic record – they were the only sub-sector to record an increase in IPD capital values – albeit very small – in January. Knight Frank thinks that while City office values will probably join in the general slide in coming months, this time round they are expected to experience a far smaller decline than the All Property index, in contrast to 1994-1996. “Leasing availability is 14% lower today, and there is the potential upside from the growing tech cluster in the northern City,” it points out.
In contrast to the 1990s, “we will not shop our way out of recession” this time, Knight Frank warns – this counts against the secondary retail market. A re-weighting of the economy towards trade and export-led employment will primarily involve office-based knowledge industries, which favours the offices sector. The firm also forecasts upside for prime logistics properties, partly as a result of improvement in the manufacturing sector and the rise of internet commerce.
The one similarity between now and the mid-1990s, Knight Frank says, will be the disparities between subsectors. While some will be hard hit, some will ride the waves. “Let us not forget the late 2009 rebound (largely driven by Central London) took the market completely by surprise,” it adds.
