The current market downturn is due to yield and price adjustments and little to do with an underlying weakening in occupier demand, according to Lambert Smith Hampton's latest Weather Map Report.
LSH forecasts for 2008 to 2011 assert that current property market fundamentals are more reminiscent of the 1970s market downturn than the 1990s crash.
Arezou Said, head of research at LSH, who outlined the findings at a seminar in Manchester, said: "If the commercial market takes the time to analyse current and historical market data, it'll find its present fear will turn to educated caution.
"Yes, we are expecting capital values to fall by a further 10-12% this year, but the extent of the fall in the investment market resembles that in the early 1970s rather than the 1990s. Occupier markets are also more balanced than they were in any previous downturn and we have a tighter development pipeline than in either period.
"The message from LSH is clear – let's be cautious but not afraid. Panic and idle hands will risk the health of the property market but value can be found through educated and informed activity that responds to tenant demand and rental growth. This will see the sector through the present uncertainty."
LSH's analysis of the 1970s and 1990s compared to present market conditions reveals the following:
- 2008 to be the bottom of the investment cycle. Recovery in total returns is expected from 2009, although not likely to get back to double-digit returns of the previous few years.
- Development has increased but not on the scale of the 1970s or the 1990s, and the credit crunch will constrain development further. This will reduce the threat of a substantial over-supply and will help to maintain rental growth.
- There are no indications that the economy will experience negative growth. GDP is expected to slow but to remain positive at circa 1.8% in 2008.
- Tenant demand is healthy and rents are still rising, although more slowly than in 2006 and 2007.
- The office market is expected to have peaked and will see a slowdown in the next three years, but rental growth will be positive.
- The retail market will remain challenging in 2008, but will recover from 2009.
- The industrial market is expected to remain stable.
- There is a risk that uncertainty surrounding the economy and the property market could lead to a reduction in tenant demand and we talk ourselves into a recession.
Prime rents in Manchester are predicted to remain steady at £28.50/sq ft, LSH said.
Manchester's industrial market will grow by 3.5% by the end of 2008, with prime rents increasing from £5.75 to £5.95/sq ft.
Retail is expected to remain flat with no sign of growth in the short term.