GVA Grimleys quarterly economic and property market review.

Overview of recent performance
All Property rental growth has continued to slow, to 3.35% year-on-year in January, compared with 3.9% pa three months previously (IPD Monthly Index). However, rents only increased by 0.5% over the three months to January, equivalent to 2.2% annualised (down from an annualised 4.1% pa three months ago). This suggests that further weakening is likely in the year-on-year rate.

The largest contribution to this slowdown has been the central London office market, and although year-on-year growth remains strong at 11.4% pa in the City and 15.4% pa in the West End / Midtown, this hides a much sharper slowdown over the last few months. This is most apparent in the City, where rents only increased by 0.7% over the three months to January, the annual equivalent of just 2.6%. In the West End / Midtown, rents increased by a much higher 2.5% over the three months (an annual equivalent of 10.2%, still well below the year-on-year rate).

Rental growth has also continued to slow noticeably in the retail sector, reaching 1.7% year-on-year in January, down from 2% pa in October 2007 and a peak of 4.2% pa in February 2006.

Rental growth in the industrial sector remains very subdued at 1.2% pa in January, slightly slower than the 1.4% pa reported three months ago.

Property yields continued to move upwards in January, with the equivalent yield on the IPD Monthly Index rising by 13 basis points, to stand at 6.3%. However, the rate at which yields are rising has eased, having shifted upwards by nearly 30 basis points in both November and December.

The total upward movement since the peak of the investment market in Spring 2007 has now been more than 90 basis points. With rents rising by less than 2% over the same period, the result has been a fall in capital values of 13.5%, wiping out all of the increase that has occurred over the last two years.

The year-on-year All Property total return fell to -7.6% in January, a marked turnaround from the +11.1% pa recorded just six months ago, and a peak of 21.6% in July 2006. During the three months from November to January, the total return was -8.6% (-30.3% annualised).

The rapid deterioration in commercial property market performance has been reflected in a sharp reduction in investment transactions. According to Property Data, transactions in Q4 2007 totalled £7.1 billion, compared with £16.3 billion in Q3, and a quarterly average of £15.3 billion from Q3 2005 to Q3 2007. Transactions in January 2007 total only £1.4 billion.

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Economic & Property Market Review PDF