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Comment: The road to recovery – UK commercial property in 2010 and beyond

William Hill, Head of Property (pictured) and Mark Callender, Head of Property Research, at Schroder Property Investment Management Limited, predict that the recent turnaround in the performance of UK commercial property will continue through the first six months of 2010, however, the picture after that is less clear.

In the first half of 2010, Schroders believes that there is sufficient momentum in the investment market to support a further recovery in capital values. In turn, yields will continue to fall, particularly as rental values are expected to reach a trough.

What happens in the second half of 2010 and beyond is less certain. The consensus view is that capital values will reach a plateau, with total returns settling at 8 to 10% through 2010-2012. Schroders’ view, however, is that performance is likely to be more volatile. If the investment market gets ahead of itself or the recovery in the economy disappoints, there is a risk of a modest downward correction in capital values in either 2011 or 2012.

There is still considerable uncertainty about the outlook for the UK economy and the degree of patience which banks will show to property investors who are in breach of their covenants. While UK commercial property is likely to perform strongly in 2010, we believe it would be unwise to simply extrapolate that into the future. Investor sentiment is likely to remain unpredictable and we expect property capital values and total returns to continue to be volatile over the next two to three years.

Although we expect quite a rapid recovery in capital values over the next 12 months that has to be seen in context. Even if capital values were to increase by 20% between mid-2009 and end- 2010, that would still leave them 30% below their peak in mid-2007.

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