Gloom grows for UK commercial property sector

The commercial property sector saw its worst performance since the crash of 1990 last month, according to new figures.

Total returns were –1.5 per cent in October, worse than the –1.2 per cent return in September, according to the latest data from the Investment Property Databank monthly index.

Not since May 1990 – when the total return for one month was –1.8 per cent – have investors seen such a poor result.

The data will be seen as the latest evidence of a retreat from shops and offices that began in the summer and accelerated during the credit squeeze.

Income return of 0.4 per cent was more than wiped out by a fall in capital values of 1.9 per cent, making a total return of –1.5 per cent.

The figures came as industry leaders took a red pen to earlier predictions, according to the latest consensus forecast by the Investment Property Forum.

The average prediction for total returns in 2007 has been revised down from 8.1 per cent in July to just 1.8 per cent, while forecasts for 2008 have been slashed from 4.3 per cent to 0.9 per cent – indicating further price falls next year.

Many experts have warned privately for two years that investors have been becoming over-exuberant, often over-paying amid heated competition for assets.

The yield on commercial property has fallen consistently – it is now well below the typical cost of mortgage debt. Since the summer, however, average “equivalent yields” have risen from a low of 5.38 per cent in May to 5.67 per cent, reflecting falling prices.

Land Securities, the UK’s largest property group, on Wednesday confirmed plans to split into three smaller companies in a move that some observers saw as an attempt to revive its falling share price. The share prices of the real estate sector have slumped since January, with some down by more than 50 per cent as investors take fright.

Land Securities insisted that the decision was an attempt to improve returns for shareholders rather than a response to its struggling share price. However, the announcement failed to revive the stock, which closed down 1 per cent.

Francis Salway, chief executive, said he thought prices would continue to fall in the coming months. “The trend will continue; it is very difficult to see precisely how much by,” he said.

But the IPD figures also showed that rents have continued to rise amid strong occupier markets, particularly in offices. Rental value growth was 0.2 per cent in October, down from 0.4 per cent in September.

The gathering gloom in commercial property comes amid questions over the health of the housing market. Surveyors are increasingly pessimistic about house prices according to the monthly survey by the Royal Institution of Chartered Surveyors, published on Monday.

The FT house price index shows that prices have fallen in half of England’s regions since June.