Thanks to by a sharp drop in rents, the commercial property market will see at least a 16% decline in capital values in 2009 and a further drop of up to 10% in 2010.
This has been claimed by RICS in its commercial property forecast published today.
Quote from the report says:
Rising defaults and credit spreads will constrain a near term recovery in financing, preventing any recovery in the investment market over the next couple of years,’ it said. ‘Low interest rates, recovering global growth and improving valuations relative to other asset classes should see the downturn gradually begin to reverse in 2011.
Mind you, the prices in commercial properties have already fallen 25% on average so far from their peak.
Why so much decline?
Businesses need to rent space for offices, factories, warehouses etc. Banking, finance and insurance businesses account for the lion’s share in terms of renting property. And these industries are expected to experience decline in coming years. Their workforce levels are almost certainly expected to decline over coming years. And then there is retail, as many people are expecting any high street names to experience difficulties too.
This will mean that companies will not need as much office, store or factory space they have at the moment. This will undermine rent levels.
Commercial property is valued based on the rent yield. If rent declines, so will the value of property.
What does this mean:
It appears that we are only half way through the commercial property price correction. As owners become prepared to accept lower rents, price valuations of their will decline. Of course, it will not affect those not selling. But people who have to sell, it will be a sad day.
Will this affect residential property?
Not directly. But he factors that affect commercial property valuation also, down the line, have a bearing on residential property values over all. Demand in commercial property will decline because companies can no longer afford them, and will have to let many workers go, giving rise to more unemployment. This will lead many home owners into financial difficulty. Which will undoubtedly have a bearing on residential house prices.
More on this story (external links): RICS, Property Week
Filed under: House Prices
