City office values may have passed their peak – IPD
Prices for office space in the City of London fell in July for the second consecutive month, says the IPD, despite the interest of overseas buyers – and this may indicate that values in the sector are past their peak.
The IPD’s UK monthly property index for July 2012 shows that values have now fallen by 2.5% across the UK since November 2011. Values for City office space rose by just 1.7% in the first five months of this year and have since declined by 0.6% across June and July.
Meanwhile the market for office space in the West End has remained buoyant, with rental values rising by 0.4% and capital values by a further 0.5%. The West End is now the only area of the UK recording consistent growth, the IPD says.
Total returns for UK property rose slightly in July, to 0.2%. The income return offered on commercial property edged up to 0.6% as a result of the lower capital values across the country.
Phil Tily, managing director for IPD UK and Ireland, noted that falling values could mean higher income yields if investors were “prudent in their asset selection”. He noted that initial yields were around 6.3% for the UK as a whole but more than 7% for industrial property and over 8% for some regional office markets. But he added that the difficulty for asset managers and investors was to find secure tenants for these discounted properties while growth remained curtailed by the government’s austerity programme. The weak demand from tenants was reflected in the second consecutive month of declining rental values, down 0.1% in July, he noted.
The retail sector improved in July, with total return turning positive again at +0.1% after two months in negative territory. But the IPD says it is debateable whether this mild slowing of capital declines for the sector will continue. Occupier demand remains subdued for retail property and rental values fell by 0.1% across the UK. However, in the South East in particular the decline in rental values did slow last month while Central London retail property continued to record growth. The hardest-hit part of the retail sector remained regional shopping centres, which lost a further 1.4% of their values in July, taking the total decline since July 2011 to 11.8%.
