Rental Conditions Deteriorate

  • All Retail recorded the first monthly fall in rents since May 2001. With the office sector also showing negative monthly rental movements, All Property year to date rental growth is just 0.2% as of July.
  • Further outward yield adjustments means that All Property capital values are now 20% lower since their peak in June last year.
  • Property is the weakest performing asset class on an annual basis, returning -15.4%  against -13.3% and 7.7% respectively for equities and benchmark gilts.

UK Interest Rates Held At 5%

  • UK CPI rose to 3.8% in June, nearly twice the government target.  However, fears relating to the health of the economy ensured the BoE left the base rate untouched.
  • Following an output estimate of just 0.2% in Q2, anecdotal survey evidence indicates a further softening in manufacturing and service sector activity.
  • Retail sales plummeted in June as consumer confidence, battered by rising energy and food prices, hit an all time low.
  • Expectation of future interest rate cuts have seen the 5 yr swapease 70 basis points to 5.4% since June.  10 yr gilts are now 4.7%, from 5.1% last month.  All UK Property Values Fall 1.9% in July

MARKET BACKGROUND

Waning investor interest and mounting fears for occupier demand as the economy slows, has lead to a re-acceleration of monthly capital value falls.  All Property capital values fell 1.9% in July, the largest monthly decline since January, and takes the year to date correction to -9.2%.  The CB Richard Ellis equivalent yield now stands at 7%, up from 6.4% at the end of 2007.

Compounding the yield impact, All Property monthly rental values fell -0.1% in July for a third consecutive month.  At 1.8%, annual All Property rental growth is now at its weakest rate since December 2005.   The All Property total return was -1.4% in July, and -6.1% y-to-date.

The debt environment for commercial property, which will have benefited from the recent fall in swap rates, remains very challenging.  As bank lending standards have tightened, lease length and covenant strength have become increasingly important.

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CBRE UK Monthly Index - Aug 08 PDF