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The commercial property market: In a downward spiral?

Updated Saturday, 21st February 2009

Commercial property prices have suffered more than house prices during the recession, as Martin Upton explains why.

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The crisis in the financial sector and the rapid descent into recession of the UK economy in the past six months have reinforced the downward momentum in the property market that commenced in 2007.

The focus of the media has been very much on the collapse of prices and of the volume of transactions in the residential market where average house prices are now around 20% below their peak in autumn 2007. But arguably the state of the commercial property market is in an even more parlous state.

The findings of market specialists including the Royal Institute of Chartered Surveyors (RICS) paint a truly grim picture:

  • Available commercial, property space is rising at a record level with Central London being the worst spot geographically and retail being the hardest hit business sector – particularly following the high profile demise of a number of high street chains.
  • Occupier demand and enquiries are now running at their lowest levels for over 10 years
  • Activity across all areas of the commercial property market is in decline and the deepening recession seems set only to accentuate this downward spiral.
  • Property owners are having to offer increased incentives to secure lettings

In the good times, pubs borrowed money against their property

But this decline in the commercial property market does not just adversely affect those looking to let property space (whilst benefiting those looking for space).

In the boom years, supermarkets and pub chains became so-called ‘property plays’. In a rising property market, they could make easy profits from selling and then leasing back properties. But in a falling market, their share prices have because of the importance of property in the balance sheet. Particularly, as did the pubs, when they borrowed on the strength of their property portfolios.

Indeed, it is partly the leverage behind the pub chains which has led to 39 pubs closing per week! Both shareholders and the lending banks – and HBOS was a major lender on property development – have got their fingers well and truly burnt.

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