Fall in commercial property predicted

Rising interest rates and institutional selling will push commercial property prices lower in 1995 after only two years of partial recovery, Erdman Lewis, the property consultants, predicts.

The firm reported a quiet market in September, normally one of the busiest times of the year as agents and fund managers return from holidays.

Erdman said continuing falls in equity and bond prices and the surprising rise in interest rates had undermined confidence in the sector. Deals were few and far between and values had fallen again.

Despite that, a rise in capital values of 5.7 per cent would lead to a total return (capital growth plus income) of 14.5 per cent in 1994. That would be better than the total return from both equities and gilts.

Next year, a forecast 2.1 per cent fall in values would restrict the total return to 6.2 per cent.

Research has shown that property values tend to rise when the growth in the economy is higher than short-term interest rates. This 'loose' policy has occurred in only two of the past 15 years, in 1987 and 1988, both years when property performed well.

Erdman expects 1994 to be a year of loose policy again, hence the outperformance, but forecasts interest rates rising to 10 per cent by the end of next year, leading to underperformance. Other issues adversely affecting the sector include new solvency requirements, which have cast doubt on the suitability of property as an asset in pension fund and insurance company portfolios.

The highly inflationary environment of the 1970s led to the proportion of property in funds peaking at just over 18 per cent in 1981. It has since fallen to 6.1 per cent.

In June, Scottish Equitable announced the sale of its pounds 250m property portfolio because its performance had lagged behind that of its other holdings.