Reasons to be cheerful – Knight Frank
Knight Frank expects UK commercial property markets to move into a period of recovery and geographic broadening for investment activity later this year. The firm forecasts that the IPD All Property capital growth index will turn positive again in September or October. It notes that the rate of decline has slowed markedly, with the month-on-month fall so far this year averaging 0.2% compared with an average decline of 0.4% m/m during H2 2012.
When the turn to positive comes, the index will have fallen a total of 5.5%, compared with a 6.0% drop during the mid-1990s double-dip, it points out. The firm expects a slow recovery after this point, rather than a rebound, as there are more corporate recovery sales still to be carried out; it also notes that while the availability of debt has improved, it is still “thin on the ground”. But many UK institutions, which have been squeezed out of the market by the many overseas investors spending on UK property, could come under more pressure to invest later in the year and the regions will be offering the higher returns that they typically seek, Knight Frank points out – “this should help spread the recovery broadly across the country,” it adds.
Nevertheless, the firm does caution that growth is expected to remain patchy across sectors, with disparities greatest at sub-sector level. It forecasts that retail will be the last of the main sectors to exit the downturn, because it is dealing with structural issues as well as cyclical difficulties. “We see retail as best suited in the next cycle to those prepared to actively and imaginatively manage the asset,” it adds, perhaps in mixed-use schemes that also involve leisure property and hotels.
Offices are set to lead the upswing, Knight Frank says. Gloomy predictions of the past that the rise of the internet and homeworking would cut the requirement for office space are proving incorrect, it says, pointing to recent developments such as Yahoo!’s ban on homeworking and Google’s purchase of its 800,000 sq ft campus site in London. “The online world has created a wave of programmer and developer jobs that did not exist 20 years ago, which are mainly office-based,” it adds.
“If the recovery is to be a slow one, assets with potential to generate uplift are an opportunity worth exploring,” Knight Frank comments. “Higher yields mean taking on more risk, seeking the pockets of opportunity in the regions, and selecting properties with asset management opportunities,” it adds.
