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The rapid shift in attitudes towards the commercial property market during the last few months shows that we are in the midst of a sharp adjustment in yields, it has been claimed.
Capital Economics says that peak to trough falls in capital value will reach 15 per cent and that property will revert to its fair value by the middle of 2008.
"Over recent months, we have pointed out that commercial property market capital flows are increasingly driven by overseas money and retail investors," the firm commented.
"Combined with the growing importance of indirect investment vehicles, this has left yields more sensitive to swings in sentiment than in the past."
A change in sentiment following the US sub prime collapse and the credit crunch has led to a rapid correction in property yields – and this means that capital values will fall by around ten per cent in 2008, on top of a five per cent drop by the end of this year.
But the prognosis for the long term remains good.
"Ultimately, our central view is that long-term investor demand for commercial property remains healthy. Nevertheless, once we emerge from the current malaise, more fluid investment markets mean that yields and capital values are likely to show much more short-term volatility than in the past," Capital Economics states.