Commercial property rental values to fall 7% over next 2 years say GVA Grimley

Commercial property rentals nationally will fall by 7% in the next 2 years as the recession begins to bite, according to the latest research.

However, with sentiment in the sector worsening by the week, falls in rental value could exceed these levels, according to the findings of The Q3 Grimley’s Economic and Property Market Review.

The prospects for the overall economy are no better, says the report, with the UK economy weakened by 0.5% during quarter three and the research predicting a 1% fall in output in 2009.

Stuart Morley, head of research at GVA Grimley, said: “The property market is feeling the effects in terms of reduced occupier demand across all sectors, following strong levels of activity earlier on in the year and the market is likely to remain balanced in favour of the tenant for some time to come. However, there are clear signs that medium to long-term investors may now begin to see value in the UK market and we believe that demand will improve during 2009 for prime investments considered to be of institutional quality.

“Our forecasts show that the difficult economic conditions witnessed during the latter half of 2008 will continue into 2009, but we are hopeful that recent action by government and the Bank of England, in particular the 250 basis points reduction in interest rates and the boost to public spending, will stimulate demand and boost recovery in 2010. What we are saying is, 2009 will be very tough, but by quarter four we could see some light at the end of the tunnel.”

“The rate of activity is likely to be much lower for the final quarter of the year and muted levels of demands are anticipated into 2009. The outlook for rental growth in 2009 is also subdued as the impact of slowing economic conditions is compounded by a significant amount of speculative completions adding to supply.”

The picture in retail was much more gloomy, said Mr Morley. “The overall retail environment remains a very challenging one” he said.

The report predicts that rental values in retail will fall 5-6% over the next 2 years, although the out of town market may hold up better due to restricted supply.

Occupier demand in the industrial market is holding up at present, despite the challenges created by the rates on empty properties and a lack of funding for speculative development.

“The underlying trend is that deals are being done on both a freehold and leasehold basis, but occupiers are trying to drive a harder bargain with developers and owners,” explains Mr Morley.

Apart from projects committed to over six months ago, there is little or no new speculative development with prospective developments being put on hold pending pre-sales and lettings as a necessity to trigger development.

The sector will feel further pressure from January 1 2009 when Energy Performance Certificates will be required on any commercial property disposal. Combined with the mounting costs of void rates on vacant buildings, an increasing number of owners are contemplating demolition of some perfectly serviceable properties.

Industrial rents will feel the effects of a deterioration in manufacturing and retail, and rents are expected to fall 4-5% over the next 2 years.

The most dramatic fall in rental values will be in the London City office market, where rapidly cooling demand and increasing space being returned to the market from failed financial sector occupiers collides with a development pipleline which is still producing space. The report suggests that national office rental values will fall by more than10%, but it avoids identifying the City office component of that, which must suggest a fall in City office rents of around 20% given that the report does say that other areas less oriented to financial services are cushioned from the fall.

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