IPF survey foresees shrinking rents and values

Rental growth in UK commercial property is expected to stay negative for two years, according to the 2016 IPF UK Commercial property market forecast. Although the survey of 27 advisers and fund managers from September to November showed a slight improvement in expectations for rental and capital value growth in the near term, the outlook is more pessimistic for 2018 and 2019 than it was last quarter. With some renewed confidence in the market following June’s referendum, rental growth for 2016 is expected to be 1.4%, up marginally from a forecast of 1.3% last quarter, while the total return is expected to be 0.6%, a rise from -0.4% previously. Rental growth in 2017 and 2018 is expected to be -0.5% and -0.1%, while capital value growth in 2018 is expected to be -0.2%, down from last quarter’s prediction of 0.5%. Industrial will be the best-performing sector for rental values, at 1.3% growth pa over the next five years.  Although the outlook for offices has improved by 27 bps in the past three months, it still lags behind the average by about 40 bps. Offices and shopping centres will see a slump in capital values in 2018 at -0.7% and -0.4% respectively, while the industrial, standard retail and retail warehouse sectors should grow by between 0.2% and 0.6%. Capital returns in commercial property will stay negative until 2019. Uncertainties and volatility in the UK are expected to keep rental value growth negative until 2019, after which the industry predicts a modest recovery. Capital value growth mirrors rental values, with a turn towards the positive not expected until 2019. However, the five-year average is still forecast to be negative. Forecasts for total returns for 2016 improved by about 100 bps in the past quarter to 0.6%, but fell by about 60 bps to 5.1% in 2018. The five-year average grew by 35 bps. However, capital returns are expected to be negative in every sector until the end of 2017. Offices, industrials and shopping centres are expected to remain negative until 2019. Industrials are expected to deliver the best performance at 5.8%. Standard retail and retail warehouses stand at 4.5% and 4.4%, with the latter seeing falls of about 10 bps in the past three months. Shopping centres, with annualised averages of 3.6%, and offices, at 3.2%, could underperform the market as a whole. Sentiment for 2016 rental values has been bolstered in the past three months as the rate of expected growth has risen from 0.9% to 2%. City offices on average are expected to outperform the rest of the office market in 2016, which is expected to see 1.9% growth. That trend is expected to reverse in 2017 and 2018. Although sentiment towards growth in 2017 has become more positive in the past three months, offices in both the West End, at -2.9%, and the City, at -4%, will likely underperform the wider office market, where falls of 2% are expected. • To send feedback, e-mail karl.tomusk@estatesgazette.com or tweet @ktomusk or @estatesgazette