By Daniel Hunter
The decline in value of commercial property will bottom out in 2013 and the latter half of the year will be marked by rising values, according to the Real Estate Predictions report from Deloitte.
Values fell 44 per cent from peak to trough during the recent downturn and whilst they recovered 18 per cent thereafter, they fell away again over the last 13 months to remain 37 per cent below their 2007 peak.
Deloitte real estate partners predict that while 2013 will show values lower over the calendar year as a whole this will reflect falling values at the start of the year. The recovery will not be seen in the data until later in the year and not with enough velocity to reverse these falls. However, this return to rising values will mark the bottom of the current cycle.
Anthony Duggan, partner and head of research at the firm, said: “We are fully aware that this could be seen as a somewhat heroic prediction given the huge uncertainties present in the global, European and UK economies and financial markets, but we believe that there are enough compelling reasons to commit this forecast to paper.
“Firstly, we saw large downwards shifts in pricing during 2012 particularly for secondary stock. It appears these values are now getting close to a ‘mark to market’ level where investors begin to see some value and are willing to transact.
“Secondly, we are beginning to see real shortages of new/Grade A quality stock in many locations as the low - non-existent in many cases - levels of development activity feed through into falling availability levels. While we do not expect to see widespread rental growth for some time yet, the potential for increases in some locations has certainly improved in recent quarters. This should underpin yield levels where applicable.
“Thirdly, the pricing of ‘prime’ stock is becoming a barrier to entry for an increasing number of investors as returns fall below their required hurdle rates. This, in conjunction with some more confidence in the occupier markets from a slowly improving economic backdrop will convince investors to widen their scope of acquisitions.”
Duggan concludes: “In short, we believe there will be value to be found outside the relatively narrow focus that we have seen most investors concentrate on over the last few years. This should drive a widening of the UK market and so stabilisation in pricing. However, this will not be at the expense of prime property which will undoubtedly continue to perform well as it maintains its attraction to a deep and diverse range of investors looking for stable, secure, long-income stream returns.”
The real estate predictions report is released in January 2013, and highlights a number of themes for the year ahead.
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