The crisis in the Eurozone, which had seemed to relent in the first two to three months of the year following the ECB’s two LTROs, has come to the fore again.

The IPD quarterly index shows that average property values declined by 0.7% in the first quarter of the year.

Economic overview: Weak showing from construction sector drags GDP down.

Initial estimates show the UK’s economy has contracted by 0.2% in the first quarter of 2012. Survey data from the manufacturing and services sector had indicated a better performance, but the particularly weak showing from the construction sector dragged the overall figure down. It is possible that the figure will be revised up when the second round of data is released at the end of May; however, this will not change the negative mood pervading the economy at the moment.

Eurozone crisis prominent again

The crisis in the Eurozone, which had seemed to relent in the first two to three months of the year following the ECB’s two LTROs, has come to the fore again. The political uncertainty and anti-austerity movement in Greece, which is now under an interim government until a second general election on 17 June, seems to be pointing towards a Greek exit from the European single currency. Meanwhile the economic situation in Spain continues to deteriorate: like the UK, Spain is back in recession, unemployment is at 25% and youth unemployment is approaching 50%.

Greece only represents 2.5% of the Eurozone’s total GDP and the probable losses from a Greek exit, although depressing, would be manageable. Therefore the real danger in a Greek exit is in the ‘domino effect’ relating to the exit of the other at-risk economies from the Eurozone – Portugal, Ireland, Italy and Spain. Including Greece, global banks have a combined exposure to public and private debt from these five countries of €2.4 trillion and so accumulated losses could run to the hundreds of billions of euros.

This is a worst case scenario, but even at a lesser extent, the impact on the UK would be enough to extend the ongoing recession, increase unemployment and lead to reductions in consumer spending and financial and business services activity.

Average property values decline in Q1 2012

The IPD quarterly index shows that average property values declined by 0.7% in the first quarter of the year. In terms of the split by sector; office capital values declined the least, by 0.3%, followed by industrial at 0.7% and retail at 0.9%. It is significant when looking at the data split by sector and market, only Central London shops and offices, supermarkets, leisure, and ‘other’ property saw capital values increase this quarter.

As a consequence, the total return for the quarter - 0.8% - was the lowest it has been since June 2009, which is reflective of the overall state of the economy. Our UKIT data supports these conclusions, with investment volumes almost unchanged in comparison with Q4 2011 and the all property yield moving out by 16 basis points to 6.98%.

Occupiers cautious of moving premises

Looking at the occupier market for offices, given the economic uncertainties it is no surprise that occupiers are cautious about committing to moving premises. Therefore, office take-up in Q1 2012 is around 30% down in comparison with Q4 2011. As a consequence, the overall vacancy rate has increased, from 11.4% at the end of 2011, to 11.9% at Q1.

As the UK’s economic outlook remains subdued, it is unlikely that the trends outlined above will see a substantial change in the coming months.