Business Real Estate - Is the Market Ready For The Next Lurch?
The UK's business real estate market has gone through something of a roller coaster over the last few years. The years from 2005 to 2007 were a classic property market bubble, showing all the signs of unsustainable growth. The ride since has been rough in the extreme. And all three sectors - office space, retail & shopping and industrial - have shared that volatile journey, and are now facing an uncertain future.
The peak in the business real estate market came in July 2007, and the next two years saw all sectors hit hard by the credit drought, and subsequent recession. Business real estate valuations as a whole fell by over 40%, in the period up to July 2009, according to the IPD Index (which tracks commercial property values in the UK and globally).
Office rents fell the fastest, down 17% from their peak in March 2008, but they did bounce back most quickly, with a subdued 0.1% growth in the last quarter of 2009 (figures again from the IPD). Retail and industrial rents fell less severely, and have also retrenched more slowly, over the last year.
As credit supply has loosened somewhat, investors have returned to the business real estate markets, with the office sector showing the sharpest rebound. Indeed there was something of a fizz around London's West End office market this year.
But these sharp fluctuations in the commercial property market, mirroring credit supply and cost, only serve to force home how the business real estate market is driven by the willingness of banks to lend. So what does the future hold? Well the latest noises from the IPF Forecast report are not promising:
"The dip in capital values next year is now predicted to be worse than previously expected. The quarterly survey shows that all sectors, except West End offices, have seen downward revisions to capital value growth forecasts. Standard shops are expected to perform the worst, with forecast capital value falls of 2.4%" (IPF UK Consensus Forecast Survey).
What is driving this renewed weakening of sentiment in the business real estate sector?
One factor is certainly the sense that a second recessionary moment, the so called 'double dip', may have been nudged closer by the swinging cutbacks announced by government. And such cutbacks are having a direct knock-on to particular market segments- for instance the office sector is quite heavily reliant on government office space. Office closures are bound to pull support away from the valuation, and rents in that sector.
But another factor may well be the forthcoming tightening of bank's financial regulation - the so called Basel III rules. This is being driven by a desire to avoid a repeat of the bank's credit debacle of 2007-8. But one of the consequences of the proposed regulations will be a lack of funds being lent out to investors by banks. This can only push the business real estate sector further down, as investors needing credit to fund purchases withdraw. And so, ironically, regulation made necessary by a property-crash driven credit squeeze may come to cause a credit-squeeze driven property crash.
It is increasingly looking like now is a good time to sell in the business real estate market.
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