Gross Domestic Product

Economic growth to help spark rent recovery, says consultant

PUBLISHED : Wednesday, 28 July, 1999, 12:00am
UPDATED : Wednesday, 28 July, 1999, 12:00am

Office rents probably will stage a marked recovery by the end of next year, spurred by a pick-up in the economy and the easing of real interest rates, according to Chesterton Petty.

In its latest research on the office sector, the property consultant said the market was showing signs of recovery, with the pace being determined by the rate of economic improvement.

It forecast that rentals would rise 5 per cent in the second half of the year and about 20 per cent next year.

Chesterton Petty said this was the most likely scenario, based on expectations of steady growth in gross domestic product and decreases in real interest rates.

It predicted that GDP would improve and return to positive growth of 0.5 per cent in the fourth quarter of this year and then rise by 0.5 per cent per quarter to 2.5 per cent in the last quarter of next year.

It also expected real interest rates to decline as the inflation rate picked up and turned positive again by next year's second quarter.

The study focused on the demand side of the equation for office rental movements. It formulated statistical models relating rents to GDP and real interest rates with an assumption office supply was elastic and had no effect on rental movement.

It concluded that the improvement in the overall economy would lift rental rates as office demand was boosted by economic growth.

'By the end of 2000, the rental index is expected to recover to the level prevailing in early 1998,' it said. 'However, it is still some 20 per cent below the peak achieved in late 1994 or early 1995.' Apart from the most likely scenario, the study looked at two less-likely cases based on more optimistic and pessimistic forecasts on economic performance and real interest rate movements.

According to Chesterton Petty, office rents could make a stronger comeback if the economy recovered more quickly and real interest rates fell faster.

In the optimistic scenario assuming GDP growth reached 3.5 per cent in the fourth quarter of next year, office rents at the end of next year could climb back to the level prevailing in the last quarter of 1995, the consultant said.

If the economic recovery came at a slower pace with GDP growth remaining in the negative territory up to the third quarter of next year, office rents would suffer longer, the consultant said.

In this pessimistic scenario where deflation was expected to prevail until the second quarter next year, rents would see a slower recovery. At the end of next year rents would be almost 40 per cent lower than the 1994 peak, it said.