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Commercial property – solid occupier markets to support capital values

Capital Economics (CE) latest overview of the commercial property market claims that it is hard to make a compelling case that commercial property is overvalued as an asset class.

The firm reported: “Admittedly, valuations in some segments, such as offices in London and the South East, look rather more stretched than the all-property average, so yields here may be the most vulnerable to any rise in rates or shifts in investor sentiment.

“But if we are right that the economy will surprise on the upside, underpinning occupier demand and rental values, and that any rises in interest rates and risk-free rates will still leave them low by pre-financial crisis standards, then it seems unlikely that the commercial property market is about to suffer another correction.”

GDP growth disappointed in Q1, which led the BoE to defer the next rise in the UK base rate but the initial survey evidence for April lends some weight to the idea that the slowdown was largely weather-driven. CE added: “We have not altered our forecast for GDP to rise by 1.8% in 2018 and 2% in 2019.”

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