Fair value in City but gloom to stay

City offices have reached fair value and the West End market will follow in the second half of this year, DTZ said this week.

However, the agent also warned that there was no “near-term end to the market’s misery”. Its annual Money into property report, published on Monday, showed for the first time in its 34-year history a decline in the value of UK stock. It fell by 10% last year to £586bn.

“We should not lose sight of the fact that we are in a significantly worse place than we were a year ago,” said the report. “GDP growth last year reached just 0.7% against expected growth of 1.6% earlier in 2008. The outlook for 2009 has deteriorated significantly with the economy expected to shrink by 4.1% compared to expectations of a 1.6% rise.” As a consequence of this and the continuing unavailability of debt, said DTZ, investment volumes would drop by 70% this year- down from an already depressed 2008, when volumes more than halved.

It also expects negative returns of almost 22% in the UK this year, caused be outward yield shifts and rental falls.

Prime rents in the City and the West End have fallen 31% and 23% respectively since the peak in 2007. Further drops of 14% in the City and 20% in the West End are predicted over the next two years. DTZ added that buying now, however, should lead to above-market returns in the long term.

Head of global forecasting Tony McGough said: “Full open hunting season for investors is not yet under way, with the majority of markets still needing to undergo further pain before they reach fair value.

“This picture will start changing in the second half of this year, though some key markets will reach fair value only in 2010”.

He added that opportunities would be “very mucho constrained” by the continued scarcity of debt funding.

More than 50% of lenders surveyed said that they did not expect a substantial recovery in the debt markets until after 2010.

June 2009, Estate Gazette