British Business Spaces At Record Low Values

Source : The Business Times, November 25, 2008

Retail premises among the hardest hit as businesses struggle to pay rents

COMMERCIAL property in Britain has hit its lowest point in more than 20 years as capital values slump and the economic downturn puts pressure on business rents.

No letting up: Tenants are increasingly facing insolvency as the credit crunch in Britain rips through corporate balance sheets

Retail premises are among those hardest hit as Britain's economy heads for a sharp contraction, with businesses struggling to pay rents and in turn forcing down the value of properties.

Last month alone, commercial property prices dropped by a record 4.3 per cent compared with September, with the market overall falling by a staggering 28 per cent from a June 2007 peak.

Figures from the Investment Property Databank (IPD) have shown that in October, prices for retail, office and industrial property suffered their biggest monthly drop in 22 years.

'We have seen a pretty dramatic drop off in capital values in the commercial property sector,' explains Ed Stansfield, property economist at Capital Economics. 'What's happened is the economic outlook has taken a big hammering over the last nine months . . . and it's pushing capital values down.'

The fallout from the downturn has taken a toll on the country's biggest commercial property companies, including British Land, Capital & Regional (C&R) and Great Portland Estates.

British Land announced last week that the value of its property portfolio has slumped by more than £1 billion (S$2.28 billion) in the past six months.

C&R has warned that its tenants are facing mounting pressure from the financial crisis while Great Portland Estates, which owns numerous properties in London, said that demand from tenants looking for substantial space had dropped sharply.

Tenants are increasingly facing insolvency as the credit crunch in Britain rips through corporate balance sheets. Against this backdrop, C&R said that it has doubled its provisions for tenant defaults to £1.5 million.

Capital Economics expects the commercial sector to continue its decline for some time, with an anticipated floor of 45 per cent below the mid-2007 peak.

'We think the economy is headed for the worst recession since the 1980s, if not the post war period,' Mr Stansfield said. 'It's going to be pretty widespread.'

According to the IPD, the retail property sector has been hardest hit in terms of monthly falls in capital values, dropping by 4.7 per cent last month.

Property consultant CB Richard Ellis has also tracked a substantial decline in commercial property values, reporting that these had dropped by 4.6 per cent last month.

The CB Richard Ellis Monthly Index suggests that prices have dropped 17.6 per cent in the year to date, as prices are put in line with the gloomy economic outlook for Britain.

According to the property consultant, overall property rents fell 0.5 per cent last month. In Central London however, the figure was 2.5 per cent.

'More companies are exercising break clauses in leases,' says Mr Stansfield. 'They are also re-negotiating rents or moving to get lower rents.'

He said that London had long been considered overpriced, hence the steeper decline in values.