Bloomberg Article - UK Commercial Property Slump Until 2011

December 8th, 2008

The U.K. commercial property market is in the middle of its worst slump on record and won't recover for at least another two years, a report by the Royal Institution of Chartered Surveyors showed.

Values for offices, stores and industrial properties may fall 25 percent by the end of 2010 as the economic recession causes rental growth to slow and property vacancies to increase, the London-based firm said. That would bring the decline from the market's peak in June 2007 to about 50 percent, said the Coventry, England-based association of real estate professionals.

The declines will exceed those of the commercial property slumps in the 1970s and the 1990s, according to RICS. Office buildings will lose most value as job cuts carried out by banks and other financial-services companies add to the amount of unoccupied space.

"We are only halfway through the price correction in the commercial property market with values set to fall through 2009 and 2010 as rental declines gather pace," said Oliver Gilmartin, senior economist at RICS.

Commercial property values will fall 16 percent next year and another 10 percent in 2010, the report said. The falling values will be exacerbated by a lack of buyers as rising loan defaults and more expensive debt curbs the recovery of the investment market, RICS said. Lower interest rates and an improving economy should lift the market in 2011.

"The rapid re-pricing across the market has pushed U.K. yields to among the highest in the developed world with a very wide gap emerging compared to finance costs," Gilmartin said.