Commercial property boom 'is over'

COMMERCIAL property returns in the UK are set to slow sharply in 2006 after another strong performance this year, according the Royal Institution of Chartered Surveyors (RICS).

A dramatic rise in commercial capital values buoyed the market in 2004, more than compensating for a subdued rents and producing returns of 18.3%, up from 10.9% in 2003.

The boom was driven by financial institutions, with a quarter of all purchases, and individual investors, who account for 10% of the market.

But while investor demand for commercial property is set to hold steady, it will not be sufficient to prevent a slowdown in overall returns, warns RICS.

The organisation sees returns remaining robust this year - albeit weakening to 11% - with rising capital values continuing to attract asset investment.

But in 2006 there will be a further slowdown to 7% as interest rate rises and, possibly, modest strength in the equity market, reduces the relative attraction of commercial property, causing capital values to level out.

In the occupier market, rent rises have been constrained in the past 12-18 months by rationalisation and high vacancy levels, even though an improved economic environment has propped up occupier demand.

The recent slide in consumer spending threatens industrial and retail rental growth, warns RICS. It is more upbeat about the outlook for the office market, which is says should benefit from healthy global economic growth into 2006.