Rics: Rental growth to stop commercial property bump

Positive rental growth will stop a hard landing for the UK commercial property market, according to new research from the Royal Institution of Chartered Surveyors (Rics).

The Rics Commercial Property Forecast published today shows that investor returns will more than half to eight per cent this year and decline further to five per cent in 2008.

However, positive rental growth is expected to result in a soft landing and the recent high profile sale and leaseback deals point to no immediate crash.

The report states: "The hysteria surrounding a potential commercial property crash in recent months has been overplayed with a strong economy supportive of rental growth and positive total returns over the next 18 months."

However, the non prime market is forecast to struggle if rents fail to keep up with inflation.

Risks highlighted for the commercial property sector as a whole include growing protectionist sentiment arising between China and the US, which is causing lower business confidence and increasing bond yields. Also the volatility in the credit market is seen as a potential threat to the highly leveraged sectors, although Rics predicts that market will settle as the "shake-out in credit is short lived".

The report also predicts that rising interest rates in Japan and the eurozone, along with upheaval in the credit markets, will hold back investor interest from abroad being stable as diversification into UK commercial property continues.

Oliver Gilmartin, Rics senior economist said: "Despite the much trumpeted rise in nominal bond yields during 2007, support for commercial property into 2008 will come from strong economic growth and rising commercial property rents.

"Stock market volatility during May 2006 and the first half of 2007 highlights the need for diversification within portfolios, with the insatiable appetite from retail investors unlikely to dry up into 2008."

He added that the evolution of the market with the growth of property derivatives and Reits will allow commercial property to become a "core asset" alongside bonds and equities.