Rental growth to prevent market crash for commercial property

Positive rental growth will prevent a hard landing for the commercial property market, says the Royal Institution of Chartered Surveyors (RICS) Commercial Property Forecast.

RICS expects commercial property to provide an 8% return over the course of 2007 as strength in the economy and rising capacity constraints continue to encourage business expansion.

2008 will see a slowdown to 5% although critically investor returns will remain in positive territory held up by advancing rents.

RICS believes that the recent high profile sale of the Citigroup tower and the HSBC building does not forebode an imminent market crash.

The listed property market signals a sharp downturn in prime commercial property prices in 2008 with the average property share trading at a 30% discount to net asset values.

RICS believes that the listed market has become overly pessimistic with only modest declines in capital values envisaged by year end 2008.

The office sector will continue to see the greatest rental advance peaking between 8-9% although a return to the 20% plus performance of the late 1980s is not expected.

Global trade and ever expanding strength in financial services continues to push the office sector beyond both the retail and industrial markets.

Rents in the retail sector will be unspectacular, rising a little above inflation as caution returns to the high street.

Interest rate rises and the growth of internet retailing have instilled efficiency pressures on retailers in recent years despite more optimistic moods in the retail industry in recent months.

The ongoing recovery in the Eurozone has supported the industrial sector but a strong pound, higher interest rates and rising oil prices will bear down on industrial rents.

RICS senior economist Oliver Gilmartin said: "Despite the much-trumpeted rise in nominal bond yields during 2007, support for commercial property into 2008 will come from strong economic growth and rising commercial property rents.

"Stock market volatility during May 2006 and the first half of 2007 highlights the need for diversification within portfolios, with the insatiable appetite from retail investors unlikely to dry up into 2008.

"The evolution of the market with the growth of property derivatives and REITs will allow commercial property to firmly assert itself as a core asset alongside bonds and equities in the years ahead."