The faith that so many investors placed in property markets over the past decade is being sorely tested. The commercial property bubble certainly seems to have burst, at least in the short term. Figures released by Investment Property Databank (IPD) for its December 2007 Index showed the sharpest monthly fall in capital values – 4.2 per cent – in its 21-year history. The total return figure also fell by 3.7 per cent, following a 3.6 per cent month-on-month fall in November.

Going into reverse
Ian Cullen, IPD’s co-founding director, commented that ‘The staggering feature of this year’s headline result is the pace of market reversal that it reflects. From a mid-teens 12-month return recorded as late as May 2007, the year has ended with the worst annual total return in 17 years. This result comes uncannily close to replicating the UK’s long cyclical pattern, whose preceding low point was a further 16 years earlier, in 1974.’

He adds, ‘These total return and capital values figures represent a continuation of the steepening falls seen over past months in commercial property. The 3.7 per cent drop in the IPD UK monthly index return comes after a similar fall in November and represents the biggest monthly fall since the index began in December 1986. Overall, the figures represent a negative 5.5 per cent all property total return to investments in UK commercial property over 2007, and annual total returns on all property were negative in every sector for the first time since June 1991.’

House prices also slowing
While the residential property market has yet to show similar falls, there is little doubt that momentum for price rises has vanished. The most recent FT House Price Index for December, compiled by Acadametrics, reveals a margin average increase over the month of 0.1 per cent, the lowest monthly rise since July 2005. The overall annual average rise in house prices remained healthy, but that figure, too, is on a downward trend.

Dr Peter Williams, chairman of Acadametrics, observes that ‘On an annual basis, house prices rose by 7.9 per cent, the lowest level since October 2006. As our national index summary indicates, the market has been slowing since August, reinforcing the view that 2007 was a year of two halves. Ignoring London, there was no overall monthly increase for England and Wales, and the annual rate fell to 5.8 per cent.’

Downward trend
He adds, ‘Although the annual increase, at nearly eight per cent, is still substantial, it is the monthly rate that has now become significant in terms of overall market direction. The FT index is trending downwards and this is in line with other market reporting. It is a rigorously constructed index and, unlike most other indices, is based on all property transactions in England and Wales.’

Dr Williams concludes, ‘With continued weakening in consumer confidence and the extensive negative commentary on market prospects in 2008, we expect this downward trend to continue despite the favourable fundamentals of demand and supply, employment and interest rates. Although there are welcome signs that the condition of the funding markets is easing, 2008 is likely to be a challenging year
for buyers and sellers, albeit that any reduction in prices must be placed in
the context of the strong performance of the market in recent years.’