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UK commercial property predicted to plunge by 25% in next two years

A sharp drop in rents is blamed for the gloomy forecast from the Royal Institution of Chartered Surveyors published today.

RICS analysts expect the commercial property market to see at least 16% declines in capital values in 2009 and a further drop of up to 10% in 2010. Its report indicates that since the onset of the credit crunch in June 2007, capital values have already fallen 25% and with more falls to come, the cumulative downturn in prices will exceed the downturns experienced in both the 1970's and 1990's.

They also predicts that rising defaults and credit spreads will constrain a near term recovery in financing, preventing any recovery in the investment market over the next couple of years. Low interest rates, recovering global growth and improving valuations relative to other asset classes should see the downturn gradually begin to reverse on 2011.

The biggest declines are likely in the office sector with capital values expected to drop a further 30 to 35% bringing peak to trough declines in excess of 60%. Employment in banking, finance and insurance has accounted for the lion's share of job creation since the millennium and this is now declining, affecting demand for office space and undermining rents, the report says.

Price declines will be exaggerated by falling rents and an increase in distressed selling as refinancing pressures bite. RICS expects rents to fall by 10% in 2009, 4% in 2010 and 3% in 2011. The office sector is expected to be hit hardest with a 16% decline in rents in 2009, 11% in 2010 and 6% in 2011.

'We are only half way through the price correction in the commercial property market with values set to fall through 2009 and 2010 as rental declines gather pace. Transaction activity is set to rise, however as more sellers become willing to accept lower bid prices,' said RICS senior economist Oliver Gilmartin.

'On a positive note, the rapid re-pricing across the market has pushed UK yields to among the highest in the developed world with a very wide gap emerging compared to finance costs. For unleveraged investors (like pension funds), high yields provide good long term value especially for prime properties,' he added.