The UK commercial property market may suffer in 2007 as rising interest rates in the US, Europe and ...
The UK commercial property market may suffer in 2007 as rising interest rates in the US, Europe and Japan, increase the cost of borrowing for foreign investors.
Property specialists believe the retail sector will be the worst hit compared to the office sector, which is expected to fair modestly on the back of a strong 2006.
According to the Royal Institution of Chartered Surveyors (Rics), returns for the retail sector will fall to 5.6% in 2007 compared to 15.4% for 2006.
Oliver Gilmartin, economist at Rics, comments: "The retail sector will bear the brunt of a consumer slowdown. Foreign investors have started to withdraw from the market as rates push higher in the US (5.25%), Europe (2.75%) and Japan (0.25%) making it impossible to borrow cheaply in foreign currencies. Investors have also become cautious as to where to put their money and are concerned shops could be left empty if consumers do not spend."
Gilmartin says retailers will be forced to sell a larger amount of goods at cheaper prices if they want to lure consumers and investors back into the market. He describes this as the "Walmart effect" - after the large US-based discount chain store.
For this reason John Buckley, property economist at Morely, is more optimistic on retail warehousing than the high street. He believes warehouses are more attractive as they offer cheaper goods. However, he says it is important to be selective when buying stocks and recommends retail centres which are not restrictive to specific shop types, which could suffer if there is a consumer slowdown.
In comparison, Stuart Law, managing director of property group Assetz, remains cautious on retail warehouses, which he believes could be damaged by internet trading. He explains: "It will only have a good chance if it is in a prime location and only then would I expect rental yields to reach 6%, slightly above the current average of 4%-5%."
He also warns against the high street, as buyers withdraw from the market and rental yields average 3%.
The office sector is also set to slow with Rics forecasting a 9.8% return in 2007, compared to 18.7% in 2006.
Gilmartin says: "Even though I expect the office sector to be impacted by higher borrowing costs for 2007, presently capital values are still rising as demand outstrips supply. Property developers have not been building in this area, following the downturn of 2001 and locations in Canary Wharf and the City have benefited from additional jobs being created in the financial services industry."
However, he warns there could be even more of a slowdown in the sector if current stock market volatility persists but for now, he expects this to be only a temporary blip.
Morely shares this view on the London office market, but he is cautious in other areas of the country. He says: "Demand for office space in London's West End is also strong because owners have been withdrawing vacant buildings from the market and refurbishing them to rent out at a later date.
"Elsewhere in the UK, the office sector is more sedate. In Reading and Newbury there is quite a lot of vacant stock and, despite a lot of IT companies downsizing when the technology bubble burst in 2001, there is still too much excess supply in these regions."
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