BNP Paribas: NW retail rents to fall again in 2010

The North West retail market will see rents fall by 8.4% in 2009 and a further 2.5% in 2010, according to Keith Steventon, head of research at BNP Paribas Real Estate.

The retail sector will begin to rise in two years' time, by 3.8% in 2011 and 6.0% in 2012, Steventon told an event at the Bridgewater Hall in Manchester on Friday.

Steventon added: "The overhang of available office space is less severe than in the 1990s and the development pipeline has been closed down faster. In the major North West hubs, there is little or no prime space being developed, which should push prime rents up very quickly once demand returns."

In the offices sector, banks, financial services and business service companies will continue to feel pressure for two or three more years as restructures continue, adding to a lack of demand for space.

This lack of demand for space will cause rents to fall further in the UK, bottoming out in late 2010 or early 2011 depending on local demand and supply balances. BNP Paribas Real Estate forecasts that office rents will have fallen 20.5% by the end of 2009, 8.0% in 2010 and 0.1% in 2011 with 2012 and 2013 set to see increases in rental growth of 5.1% and 6.7% respectively. The office sector in the North West will see falls of 4.4% in 2009 and 3.5% in 2010. 2011 will see modest growth of 0.3% followed by further increases of 2.6% and 4.9% in 2012 and 2013 respectively.

The UK logistics occupier market may have a longer wait for rents to pick up due to bigger void rates, meaning that demand will have to build before rents can increase. BNP Paribas Real Estate predicts a fall of 5.6% in industrial rents in 2009, 2.7% in 2010 and 0.8% in 2011before rising an average of 2.7% year on year until 2014 in the UK. Comparatively, the North West industrial sector will experience a fall in rental growth of 9.4% in 2009; with the annualised growth from 2010 to 2014 reaching 1.5%.

However, while UK investment activity has picked up and prime yields have hardened for the last two months in a row, the falling rents are continuing to have an effect on capital values – resulting in a further fall in values this year.

BNP Paribas Real Estate is predicting a fall in capital values across all sectors nationwide in 2009, with offices seeing falls of 7.4%, followed by industrial at 7.3% and retail at 6.5%. However, 2010 will see a rise of 7.1% in industrial capital values, and 6.7% and 5.7% for retail and offices respectively.

Steventon said: "UK values should rise next year as long as a slow economic recovery does not hold rents down for longer, and as long as investor enthusiasm for property continues to push values up. What we may see is some of next year's predicted growth in capital values realised towards the end of this year and, of course, our predictions of rental falls may be too pessimistic if occupiers find a new-found confidence in the market."

Steventon added: "Further falls in capital values will no doubt draw more investors into the market – particularly in Central London where prime property is still looking like a bit of a bargain. Banks are reducing their exposure to commercial property, so investors will be mainly equity, meaning that the sub-£50m purchases should continue, subject to the prime stock at this margin being available."