Although commercial property transactions now seem to have found a floor, Capital Economics doubts that they will rebound strongly, although it is more likely that activity levels will improve to some degree over the coming quarters, pushing yields lower and generating a total return this year that is less negative than existing forecasts.

On a six-month average basis (which smoothes volatility and reduces the influence of any seasonality in the data), figures from Propertydata showed that the value of transactions has been stable at around £1.4bn per month since late last year. In a historical context, transactions have averaged £2.8bn per month so it is still a very low base. Capital Economics believes one reason why investment activity will rebound strongly over the short to medium-term is due to over-exposed lenders trying to cut the size of their property loan books.

Nevertheless, it seems probable according to Capital Economics that the volume of commercial property transactions will increase, even if the improvement is modest. For a start, sustained pooled property funds may well start to spend the net inflow of new money that they received from retail investors in Q2. What’s more, with the exchange rate weak and the downturn here perceived as being the most advanced, there is little sign of overseas buyers’ appetite for UK property abating, according to Capital Economics, and UK institutional investors are also poised to re-enter the market.

However, the impact on yields, capital values and total returns of a recovery in investment market activity is difficult to judge although Propertydata’s figures seem to support anecdotal evidence that the yields on those transactions which are taking place have not only plateaued but also begun to fall back slightly.

Capital Economics doubts that transactions will recover to their 2006/07 levels anytime soon but it does look almost certain that investment market activity will improve and yields will fall further over the remainder of 2009.