After a likely total return of -7% or so in 2009 as a whole, a rebound to 15% next year might, at first glance, appear too rapid. But according to Capital Economics, history shows that total returns can jump very sharply in the first year of a recovery, as they did in 1975 (from -16% in 1974 to 11%) and 1993 (from -2% in 1992 to 20%).
However, this plausible upside scenario it is not the company’s central forecast, which is for total returns to be about 6% in 2010.
Commenting, Capital Economics’ Kelvin Davidson, said: “In our view, the downturn in commercial property capital values is all but over. Admittedly, with economic growth and occupier demand likely to remain soft, our central forecast is that capital values will stabilise rather than increase over the next 12-15 months. Even so, after adding solid income returns, broadly stable capital values would allow total returns to improve to around 6% in 2010.
“Bringing all of this together, historical analysis and a priori reasoning suggest that there is a chance that total returns could get as high as 15% next year. That upside scenario, driven by the sharp rebound in investor sentiment and the sheer weight of equity poised to (re-)enter the market, would be markedly better than our current central forecast for total returns in 2010 of 6%.
“The commercial property downturn is now all but over, though there is little basis for expecting a return to the boom conditions of 2004-2006. Admittedly, past experience suggests that our forecast for total returns of 6% in 2010 may be too cautious. But while a stronger outcome cannot be ruled out, in our view, any commercial property mini-boom over the next year or so that is founded on sentiment and liquidity – rather than on fundamental drivers such as solid tenant demand and rental value growth – may simply result in the market overshooting and becoming expensive again. That could set the scene for a renewed bout of capital value falls in 2011. In other words, the stronger the near-term rebound the greater is the scope for weak returns thereafter. If total returns do turn out to be 15% in 2010, our forecasts for the subsequent 2-3 years will almost certainly be revised down.”
