Occupier conditions in the commercial property market have yet to show any reaction to events in credit markets. Despite the recent turmoil, office rents saw their biggest monthly pick up in close to a year, up 0.7% in August pushing the annual growth rate to 8.6%. A measured slowdown in retail rents continued at 2.2%, the slowest annual pace since January 2003. In the industrial sector, rents have remained pretty flat despite reports of ongoing strength in the manufacturing sector.
The latest economic data has been buoyant although significantly, downside risks to office rental growth have increased. A material fall in financial services output could clearly put the brakes on the rapid growth in office rents which have supported overall property rents over the last year. Total returns continued to decline across the board in August as capital values eased in the retail and industrial sector for the second consecutive month. The re-pricing of risk which is underway in the financial markets will impact on commercial property values into 2008. A rise in risk premiums will push yields higher and reduce capital values modestly over the next 18 months. RICS expect a total returns to be relatively flat over the next year as a result.