UK commercial property drop ends 14-year boom

Posted On Wednesday, 19 March 2008 02:00 Published by
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Commercial property prices could fall by up to 15% in the coming months after dropping as much in the past six months, according to a report released yesterday

The warning comes after several big insurers closed commercial property investment funds to withdrawals to prevent panicking small investors trying to pull out money.

Rob Martin, head of property research at Legal & General investment management, said the speed of the plunge in property values was "unprecedented" in modern times but was far from over.

"After 14 years of positive returns, the UK commercial property market went into sharp reverse in the second half of 2007," Martin said.

The credit crunch, which began in August and took a turn for the worse last week, increased the cost of borrowing and reduced the availability of funds to buyers of commercial property, suddenly making investors far more averse to risk, he said.

Commercial property had given total investment returns of 18.5% in the three years from 2004 to 2006, he said, but returns had now gone negative because of the sharp fall in capital values.

Axa, Friends Provident, Scottish Equitable and Scottish Widows have been forced to turn away withdrawal requests from hundreds of thousands of small investors holding up to £8bn in property funds, some of which have halved in value.

Martin said his best guess was that capital values of commercial buildings had another 5-10% fall before they bottomed out, perhaps later this year, as signs were already emerging that the market was beginning to stabilise, although transaction levels remained well below normal.

But he acknowledged that "substantial" risks to that forecast remained related to the banking sector and the economy.

He acknowledged that much would depend on how much the banks were willing to lend on commercial property and how willing they would be to roll over existing credit on assets that were falling in price.

"We are in amber territory but it is too early to say what the impact will be of Bear Stearns. The credit crunch underlines the downside risks. If the banks don't refinance loans there could be substantial further losses," he said.

But on the positive side, he said commercial property values had already returned close to "fair value" after the boom of recent years.

He said commercial property yields had already begun to turn up and were now back above government bond yields at about 5.5%. That could well attract canny buyers back into the market later this year, he said, especially if prices bottomed out and lifted again.

He said there were already signs that some overseas buyers, in particular German property funds, which had long inclined towards UK property, were back in the market.

Long-term commercial property remained a good bet because rents tended to rise in line with the economy and had upward-only rent reviews, offering steadily rising income along with potential capital growth.

Publisher: The Guardian

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