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Are commercial property values close to their peak?

In the latest UK Commercial Property Focus by Capital Economics, Ed Stansfield says: ‘A comparison with previous upswings suggests that commercial property capital values will peak within the next six months. Yet property is not obviously overvalued while occupier fundamentals are both strong and improving. So unless a major shock were to tip the economy back into recession or policymakers are about to implement a significant shift in monetary policy, we suspect that this time, things really will be different.

‘In February, rental value growth and yield compression each lifted all-property capital values by 0.2% compared to January. The significance of this is that for most of the past two years, capital value growth has been driven almost exclusively by falling yields. Thus the data suggest that the upswing is maturing, or entering a second phase in which rents start to deliver the growth anticipated by investors.

‘Yet similar patterns have been observed three times in the past 20 years and, unfortunately, they suggest that recent developments are more of a cause for concern than for celebration. On each occasion, the end of a long period of yield-driven capital value growth has heralded the next downturn, not the start of the second phase of the upswing. So why should this cycle be different? The answer lies in the encouraging outlook for rental values.

‘In each of the three previous examples, investors’ expectations for future rental value growth were never realised. Today, by contrast even if we are too optimistic about the growth outlook, the recovery has far stronger foundations than in 2011. That suggests that occupier demand and rental values should prove more resilient. Accordingly, we find it hard to see what will trigger a premature end to the current commercial property upswing.’

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