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The deterioration in the commercial and residential property markets have so far followed a broadly similar pattern, albeit with the commercial market making the front running by some months. First, transaction volumes stalled due to tightening credit conditions and worries about valuations. Following this, the property professionals got to work trying to push down prices in order to get things moving once again. While this process is yet to make a really marked impact on the residential market, there has already been a sharp devaluation of commercial property - IPD All Property capital values fell by almost 12 per cent in the six months to the end of February.
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However, there are now signs that a fresh wave of problems could hit the commercial property market. Earlier in the year we suggested that the quoted real estate sector could be in the eye of the storm, with share prices stabilising thanks to ebbing price falls, but with the possibility of serious falls in rental returns on the way. Despite talk heading into the downturn that rental conditions looked strong, there are now worrying signs of weakness coming from both City office tenants and stretched retailers. That looks particularly bad news for those companies hauling up new un-let buildings in the City, such as British Land and Minerva . Indeed, broker Lehman Brothers, which has made several good calls on the prospects for the quoted real-estate sector during the downturn, last week moved from positive to neutral on the sector due to worries about rental conditions.
For those in the residential market, it is worth considering whether the experience of the commercial sector will continue to have salience. So far this year, the buy-to-let market has been buoyed by strong rental growth. However, while supply is tight, worsening economic conditions are likely to hit tenants' ability to pay - which could well spell further dose of pain for all involved.
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-IC-2.1.3g-prod - 17/03/2010 18:13:09 - ben.wheeler
