Commenting, Kelvin Davidson, property economist at Capital Economics, said: “Although we share the view that all-property total returns will average 5-6% over 2009-2013 as a whole, we suspect that the latest Consensus forecasts are too pessimistic about the prospects for the next 12-18 months and too optimistic thereafter. The very real chance that weak bank lending holds back the economic recovery is a key reason for our subdued longer term property forecasts.
“Looking first at 2009, the Consensus now anticipates smaller falls in rental and capital values than last quarter and a less negative total return (-15% versus -12%). To our minds, however, these forecast upgrades have not gone far enough. Most notably, the Consensus forecast is for capital values to fall by 18% in 2009 as a whole. On the IPD Monthly index, capital values have fallen by 13% since December, implying the Consensus envisages capital values falling further over the rest of the year. Given the recent clear improvement in market sentiment and pricing, that seems unduly pessimistic.
“The Consensus forecast for total returns in 2010 has also been upgraded, from 3% to 6%, with the most pessimistic individual forecaster expecting a total return of zero and the most optimistic a return of 12%. We agree that 2009 is likely to be the last year of negative total returns in this downturn, and share the Consensus view that they will be around 6% next year.
“However, despite our more optimistic short-term outlook, taking 2009-2013 as a whole, our views don’t differ materially from the Consensus – for example, we share the view that total returns will average 5-6% per year over that period, below the average of the past 30 years of around 9%. This is because we do differ in our views about the likely profile of the recovery. We think that capital values have already more or less reached a floor, and, accordingly, we are less pessimistic on total returns this year than the Consensus (-7% versus -12%). But we also think that from around the middle of next year, the emerging property recovery will fade as it becomes clear that economic growth will not return quickly to trend (and risk appetites falter) and bank lending remains subdued.
“Indeed, in 2011, we expect commercial property total returns of less than 9%, lower than the Consensus forecast of 11% (and much lower than the maximum individual forecast that year of 19%). In our view, a more cautious view on property’s longer term prospects is consistent with an environment of rising unemployment and lingering investors’ concerns about income security.”
