The IPD Monthly Index for May showed that returns from UK commercial property were still falling. The index saw a total return of -0.7 per cent month on month in May 2008, slightly lower than the -0.5 per cent figure for April. However, the positive sign was that this was still a significant improvement on the -3.7 per cent seen in December 2007.

Nevertheless, returns from commercial property remain under pressure. Malcolm Frodsham, research director at IPD, observed that ‘After 11 months of falling capital values, May 2008 also registered a very small fall in rental values. This is the first month that both the yield and rent drivers of capital value growth have been pushing in the same downward direction.’

Declining slowly
He adds, ‘Capital growth fell marginally, from -1.0 per cent in April to -1.2 per cent in May, while income return remained unchanged at 0.5 per cent month on month. On a 12-month basis, however, the all-property total return hit a record low of -13 per cent in May, down from -11.7 per cent in April, as the relatively strong months of the first half of last year are successively dropped from the calculation.’

Frodsham also points out, ‘On a sectoral level, the monthly total returns across three main sectors all drifted lower in May. Office total return, in particular, which came in
33 basis points lower at -0.9 per cent, underperforming Industrials and Retails as the worst performing sector this month. At the All Property level, the income returns ticked down to 0.46 per cent for the first time since September 2007.’

The news from the residential property market is not much better. The FT House Price Index for May indicated that UK house prices fell, on average, by 0.6 per cent over the month, the third consecutive month of price falls and the largest monthly fall since February 1995.

House prices levelling out?
Commenting on the figures, Dr Peter Williams, chairman of Acadametrics, the analytical company that produces the FT House Price Index, pointed out that ‘On an annual basis, house prices still rose by 2.7 per cent but this is the lowest annual growth rate recorded since June 1996 and it is the ninth month in succession that this rate has fallen. Excluding London, this rate of increase would be even lower at 1.6 per cent.’

However, he does detect some positive signs: ‘Nevertheless, these figures do challenge the perception of a housing market in steep decline as suggested by some other indices. Firstly, the FT index is based upon all property transactions in England and Wales – i.e. cash sales and mortgage-backed transactions – and is not influenced by, for example, the current mortgage policies of lenders and by any reduction/redirection in lending.

‘Secondly, the FT index reports on final transaction prices, as distinct from the asking and mortgage offer prices reported in all but one of the other house price index series. A third reason is that there is now a great deal of haggling over prices, with sellers accepting prices lower than those originally asked, albeit rather slowly.’

Dr Williams concludes, ‘The continued contraction and repricing in the mortgage market are adding to the downward pressure on prices, and there is little sign yet that liquidity is recovering. But decline in the mortgage market should not be exaggerated. Mortgages continue to be taken out, and April saw gross lending of over £25 billion. But with continuing evidence of the slowdown gathering momentum, there is now in effect a race – will any hoped-for capital market recovery arrive in time to revive the housing market? Currently, the market slowdown is winning.’