Have commercial property values reached the bottom, or is there further to fall? This is the question that's been troubling property analysts and researchers, who in the past few weeks have issued a series of contrary views on the fate of the sector.
Real estate shares and asset values took a battering in the final quarter of 2007, but optimists insisted that a healthy occupational market would prevent a rerun of 1990s-style carnage. And, in January, real estate bounced back to become the best-performing sector in an otherwise gloomy FTSE All-Share, rising by 5.3 per cent.
But hopes of recovery now appear to have fallen flat. Real estate has been the second worst-performing sector, dropping by 9 per cent, and several vulture funds are preening their feathers in the hope that property values will follow suit.
In December, IPD figures measuring total returns on commercial property investments (rents and capital values) plunged to minus 3.7 per cent, the worst for 20 years. But confidence has been shored up since then as the rate of decline has eased; March figures show total returns of -0.8 per cent.
For investors, the pain of falling capital values has been numbed by moderate rental growth. However, figures released this week by CB Richard Ellis show that average rents have now started to fall across all property sectors - prompting fears of the dreaded 'double dip', where both rents and capital values decline.
"The fall in rental values is almost entirely limited to the office sector and, more particularly, sharp falls in most central London markets," says Peter Damesick, CBRE's head of UK research. In the first quarter of 2008, office rents fell by 1.7 per cent overall, but City of London rents dropped 5 per cent.
Earlier this month, Lehman Brothers predicted a 15 per cent decline in City rents in 2008-09 due to oversupply and waning occupier demand. Analyst Mike Prew calculates that the equivalent of 11 empty Gherkins, the nickname of the Swiss Re building in London, are currently under speculative construction from the likes of Minerva, British Land, Hammerson and a host of private developers. If forecasts of 10,000 City job losses are also correct, the equivalent of three further empty Gherkins could end up back on the market.
"After the short, sharp shock, the risk is now that rents are going to go through the same process - and that is when insolvencies may be triggered," Mr Prew warns.
