Property still too dear, says JPMorgan

HOPES of an imminent recovery in the commercial property market were dampened yesterday after JP Morgan forecast further troubles for the sector.<br /><br />&nbsp;The bank slammed the recent property stock rally as mere &ldquo;castles made of sand&rdquo; and said the upturn was just &ldquo;building a highly vulnerable property market with a small margin for error.&rdquo;<br /><br />Commercial property values have plummeted by 40 per cent from the peak in June 2007. But stocks in the sector have rallied by 98 per cent since March 2009 &ndash; the strongest rally for 34 years &ndash; buoyed by green shoots talk and market efforts to predict the bottom of the slump.<br /><br />JP Morgan said that to achieve a 15 per cent share upside in the sector, property values in the UK would need to jump by 20 per cent &ndash; an unlikely scenario during the current economic turmoil.<br /><br />Outlining the premature nature of the rally JP Morgan argues that to justify the share rally, office headline rents would need to bounce from their low by 75 per cent next year, to set a new high of &pound;72 per sq ft. City offices are currently only fetching around &pound;40 per square foot.<br /><br />JP Morgan said that property stocks are already 14 per cent too expensive and any further uplift could be matched by a sharp correction of around 41 per cent.<br /><br />The gloomy outlook is echoed by a report out yesterday by BNP Parabis, warning the commercial offices sector will continue to feel the pressure for the next two to three years.<br /><br />BNP Paribas Real Estate is predicting a fall in capital values across all sectors of 14.7 per cent for the whole of 2009, with offices faring worst with an 18.4 per cent drop, followed by retail dropping 13.4 per cent and industrial falling by 10.2 per cent. BNP Paribas forecasts retail values will recover by 45.4 per cent, industrial values will rise by 29.6 per cent from 2009 to December 2014, and office values will rise 13.7 per cent.<br /><br />BNP Paribas Real Estate research director Keith Steventon said: &ldquo;There is always a risk, of course, and this is that the economic recovery that everyone is looking towards is not sustained and this brings any burgeoning property recovery down with it.&rdquo;