City office prices
14 August 2012
Office prices in the City of London fell for the second consecutive month in July, despite pressure from overseas buyers, indicating values in the sector may be past their peak, according to IPD. The IPD said the disappointing result was the first time that the City office market has seen two straight months of declines since August 2009.
In the last three years they have seen cumulative growth of over 36%, but this largely tailed off in 2012. Values rose by just 1.7% in the first five months of the year, and fell by 0.6% across June and July. The West End office market remained buoyant, with rental values increasing 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 and according to the IPD UK Monthly Property Index values across the UK have now fallen by -2.5 per cent since November last year.
Despite capital write downs in the City, total returns for UK property rose slightly in July, to 0.2%. Declining values in the retail sector abated slightly, and the income return offered on commercial property crept up to 0.6%, a result of the lower capital values across the UK. Phil Tily, managing director for IPD UK and Ireland, said: “Falling values, though difficult for a market struggling with financing, do mean higher income yields, if investors are prudent in their asset selection. “Initial yields are now around 6.3% across the UK, but they rise to over 7% for industrial assets, and over 8% for some of the regional office markets. “The difficulty for asset managers and investors remains in finding secure tenants for these discounted properties, a considerable challenge while the government’s austerity cuts curtail growth.
As a sign of the lacklustre demand from tenants, rental values fell for their second consecutive month, by -0.1 per cent.” July was a better month for the struggling retail sector, with total return coming back into positive territory, at 0.1%, having been negative for the two months before.
Occupier demand for retail units remains subdued, however, and rental values fell by a further -0.1% across the UK. However, falls in retail values slowed in July, particularly in the South East, and central London assets continued to record growth. Regional shopping centres continued to be the hardest hit part of the retail market, losing a further -1.4% of their values in the last month, and have now seen cumulative capital declines of -11.8% since July last year.