Commercial Property Confidence (CPCI): Let's see how the market feels 18 months on

It is now almost 18 months ago since we ran our last commercial property confidence survey. At that stage we were seeing an increasing emphasis being given to underlying property fundamentals. It is important, if not critical, to gauge the direction in which the market believes some of these key issues are moving and to this end the commercial property confidence survey aims to give consideration to these aspects: Eighteen months ago, the eProp CPCI index appeared to be struggling to find direction having effectively deteriorated, reaching a level of 42 as at August/September 2010 compared with a reading of 47 at February/March 2010. With 50 being neutral, the reading was largely negative, but nevertheless a little better than the levels of 36 and 37 registered in the same periods in 2009. The CPCI cycle trend suggests that the peak was reached in early 2006. The bi-annual eProp Commercial Property Confidence Index (CPCI) Survey is based on a mix of ten equally weighted variables comprising both `hard' and `soft' business conditions; the index reflects a six month forward projection for the commercial property sector. From a sector perspective and on a net balance basis (ranging from +100 to -100 with 0 being neutral), both the office and industrial sectors worsened marginally. The Office sector's net balance reading in August/September 2010 was at -9, down from zero 6 months prior; the industrial sector showed a reading of -22 from -1 six months prior to this. Although retail remained negative at -17 this was the only sector to have shown a small improvement on the period six months prior, where the reading was at -23. This was the sixth consecutive negative outlook for retail commencing in Feb/March 2008 albeit up from its lowest level of -42 reached in 2009. In terms of the ten issues constituting the index, seven issues remained negative, two held a positive outlook on aggregate with one aspect exactly neutral. On the positive front it was the number of leases and sales - albeit only just positive - with 5 and 8 percent of respondents respectively anticipating any improvement. Sale prices were expected to remain static, not withstanding that a net balance of 23 percent of respondents expected capitalization rates to rise. At the time, monetary policy supported this outlook given that the prime interest rate reached its lowest levels in recent history; however this too can still rise in 2012 although the any clear prognosis therefore remains murky at best. In line with the softening yields score representing the second most negative response, 23 percent of respondents anticipated that staff levels would reduce 18 months back. True to form, the factor considered most negative remained the outlook for the management of the public environment in which assets are located in. There has been a fair amount of focus on municipal management of late and it will be interesting to see if this arena is still spiraling for investors and property managers. The outlook for vacancies remained negative at -13 percent, although it has to be said that this was up from the -67 percent recorded a year back. Net operating income was anticipated to come down as evidenced by a net balance of 18 percent of respondents. Retrospectively we see that the eProp CPCI is a very useful barometer for commercial property and business conditions and has been very accurate in terms of market movement.