UK commercial property prices in February 2012 – third monthly decline in a row and the declines are getting bigger

Image above of the €120m Gerry Gannon Chrome portfolio for sale through Savills in theUK.

Today sees the publication of the February 2012 IPD Monthly Property Index for the UK. The IPD (Investment Property Database) index is the only UK commercial index referenced by NAMA’s Long Term Economic Value Regulations (Schedule 2) and is used to help calculate the performance of NAMA’s “key markets data” shown at the top of this page.

The Index shows that capital values fell by 0.3% in February 2012, following two previous months of declines and several months of almost flat performance. Prices reached a peak in the UK in June 2007 and fell steadily until August 2009 when the current rally started. Prices then increased by 15% in the year to August 2010 but since then prices are up a measly 1.4% and in the last 12 months prices have increased by an even more measly 0.4%. Overall since NAMA’s Valuation Date of 30th November, 2009 prices have increased by 10.9%. Commercial prices in the UK are now 34.5% off their peak in June 2007. The NWL index  remains at 828 which means that NAMA needs to see a blended increase of 20.7% in property prices across its portfolio to break even at a gross profit level (taking into account the fact that subordinated bonds will not need be honoured if NAMA makes a loss).

The table below shows the change in value of an index set at 100 at 30th November, 2009 and applying the month-on-month % increases in a compound manner.

The overall outlook for the UK economy is muted in the short term. The UK chancellor, George Osborne is set to unveil Budget 2012 on 21st March, 2012 and the next economic outlook from the UK’s Office for Budget Responsibility – roughly the equivalent of our own Fiscal Advisory Council – will also be published on 21st March. The UK economy contracted by 0.2% in real GDP terms in Q4, 2011 and the expectation is that growth will be less than 1% in 2012, that inflation will be 3-4%, that interest rates will remain low – the current Bank of England rate is 0.5% and has been since February 2009. And there might even be another round of quantitative easing that has so far seen almost GBP 300bn pumped into the GBP 1.5tn UK economy.

About half of NAMA’s UK portfolio was located in London which has so far performed very well from Aug 2009 to Dec 2010 but has been more subdued over the past year. Supply shortages and money chasing a relatively stable investment have maintained prices and there might even be a short term fillip from this years Olympics. Beyond London and the English south east, there is evidence of prices waning amidst sluggish economic growth and stunted lending.