The commercial property market is having a rough time of it – you just need to look at London’s skyline to realise that. The number of cranes towering over the capital has fallen by a fifth in six months, reports the FT, with developments down from 46 this time last year to just 17.
Already, UK commercial property values are down 24% from the highs set in July 2007, according to Investment Property Databank, as credit and transactions have dried up. The actual fall may be worse. As so few properties are being sold, valuers have virtually no recent transactions to benchmark their valuations to, and are warning that “they are having difficulty in setting reliable prices”, reports the FT.
With more redundancies ahead, things are set to get worse. Rental vacancy rates are soaring in the City and West End, up from 4.2% in 2007 to 8.8% today. But with the Centre for Economics and Business Research forecasting that London could lose 62,000 finance-related jobs in 2008 and 2009, vacancy rates could hit 12.12% next year, says Jones Lang LaSalle.
It’s not just offices that will be left empty. Liberty International, the UK’s biggest owner of shopping centres, has raised its contingency fund for bad debt to £10.2m from £4.5m in September 2007.It expects many of the retailers who pay it rent to go bust in the New Year. Liberty has already cut £1bn from its £8.9bn property portfolio. Land Securities, meanwhile, has wiped £1.5bn off the value of its £13.6bn portfolio of shopping centres and office blocks.
There is some good news. The slowdown in construction means less new office space is coming on to the market, with Jones Lang LaSalle forecasting a drop in available space from 3m sq ft in 2008 to 1.52m sq ft by 2010. That should help stabilise rents. But with no sign of banks starting to advance money on property developments, the FTSE 350 Real Estate Index – already down 30% in the past six months – looks likely to fall further. Morgan Stanley has downgraded several British commercial property stocks, and expects further sharp falls in their share prices as they continue to have trouble selling assets.
That’s bad news for property funds, particularly open-ended ones, which are finding it impossible to sell property fast enough to meet investors’ redemption requests. Last week, the Aviva European Property Fund halted redemptions as its cash level fell to below 9% from 26% at the start of the year, and others are expected to follow. Stay clear for now.