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LONDON-The economic slowdown in the US and the UK will hit the performance of UK commercial property over the coming five years, broker GVA Grimley has forecast. At the beginning of 2001 it was forecasting an average growth rate of 3.7% per annum,but the deteriorating economic picture has led it to revise its forecast downwards to just 2.7% per annum. At this level, rents will struggle to beat inflation.

GVA Grimley’s head of research Stuart Morley says: ‘Our figures indicate that rental growth will weaken over the next two years, bottoming out in 2002/3, before recovering in the subsequent two years.’ Morley says that offices would remain the best-performing sector, and London the best-performing location.

London office rents grew by 10.2% on average over the 12 months to June 2001, and GVA Grimley is forecasting that this rate will fall to an average of 3.5% per annum over the next five years. This compares with an average growth rate of 2.7% per annum across the UK.

Average retail rents are expected to grow at 2.6% per annum over five years, down from 3.7% this year. However, retail warehouses are expected to outperform other retail sub-sectors with 2.9% growth, while shopping centres will underperform slightly at 2.5%. Industrial rents grew by an average 5.3% over the past 12 months, but this rate is expected to fall to 2.8% per annum over the next five years.

Despite the downbeat forecast, Morley says that all property sectors would continue to show positive rental growth even at the bottom of the current cycle. And he pointed out that even as rates of return declined, property was still outperforming equities and government bonds. GVA Grimley is forecasting that the total return on all property will average 9.9% per annum over the next five years.

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