Commenting, Kelvin Davidson property economist at Capital Economics, said: “Upward revisions in the latest survey pushed the IPF Consensus into line with our own view that IPD all-property rental values will stabilise later this year and rise modestly in 2011.
“Yet, depending on the strength of the Central London office market recovery, there are still potential upside risks to our view. But, given the likelihood of increased regulation in the financial services sector, we are wary of becoming too bullish about the prospects for office and, hence, all-property rental values.
“The pace of decline in IPD all-property rental values has slowed markedly in recent months and they may now be within 1% of their eventual floor. However, expectations for the speed and timing of the rental recovery vary widely. The more bullish forecasters expect rental values to end 2010 higher than they started it. By contrast, the pessimists expect rental value growth still to be negative in 2011.
“Our forecast, now mirrored by the consensus, is that all-property rental values will finish the year about 2% lower than at end-2009 but that they will rise by 1.5% in 2011 and a further 2.5% in 2012. Our rationale is that with employment still falling and a significant tightening in fiscal policy now imminent, a strong recovery in economic growth and thus commercial property occupier demand is unlikely.
“It is important to note, however, that the (modest) recovery that we expect in all-property rental values depends to a large degree on the performance of the Central London office market. Indeed, consistent with soft occupier demand, we expect average rental values outside the City and West End to decline by about 4% this year and do no more than stabilise in 2011.
“However, the historical experience of City and West End rental values in the first two years of a recovery, if anything, makes our current forecast for 2010/11 look slightly too pessimistic. What’s more, anecdotal evidence suggests that agreed rents on some of the best buildings in these markets have already risen by at least 10% since the start of the year.
“Thus, the balance of risks around our forecasts for all-property rental values may actually be on the upside. For now, however, we are still wary of becoming too bullish.”
