The UK Commercial Property Market - A temporary blip or something more significant?

Implications: James Rossiter's article suggests that there is a difference between the current fall in UK office and retail property prices and that which occurred about 15 years ago when it took several years for the market to recover. He implies that the current downturn is likely to be shortlived and that the commercial office and retail property market will bounce back fairly quickly, particularly since the prevailing conditions are very different. His article is very relevant as the bouyancy of the UK property sector is inextricably linked to the health of the UK economy generally.

Analysis:

From a construction perspective, the level of new orders within the commercial office sector has never been higher, with occupier demand for space continuing to rise into the third quarter of 2007. This is coupled with the lowest space availabilty for six years.

However, London accounts for approximately 40% or more of the office construction market and a number of very major schemes in the development pipeline, for example, The Shard on London Bridge, The 'Cheesegrater' on Leadenhall Street, The 'Walkie Talkie' on Fenchurch Street and 'The Pinnacle in Bishopsgate all appear to have stalled, whether through financing or planning problems. These projects however tend to distort the picture as they are each almost three times the average size of commercial office projects constructed only a few years ago

This hesitation though adds fuel to the argument that developers are concerned by the fragility of the market, particularly given the uncertainty surrounding the major financial institutions' future space requirements in the City. After all, it is those corporates that have leased prime office space and supported the London office market in the past.

In comparison to the prolonged downturn of the early 90's when values dropped over a lengthy period, this is likely to be a short term phenomenon, as James Rossiter's article suggests. Yields may well have risen but, borrowing rates in the UK are set to fall and demand is likely to outstrip demand in the medium term. In comparison to the London market, regional hotspots throughout the UK are likely to remain bouyant and witness rental growth throughout the period.
 
The commercial retail sector is another matter, driven as it is by the level of consumer spending and the general state of the economy. Household disposable income and, therefore, expenditure in the UK has been squeezed, resulting in depressed retail sales volumes. Consumer debt levels have never been higher and the recent credit crunch is likely to restrict future lending and this will further deter spending. Shopping centre values and returns are under considerable pressure and a number of retail property sales have failed recently. A huge increase in internet shopping is adding to the traditional retailers' woes.
 
However, a relaxation in interest rates during 2008, coupled with more prudent lending policies is likely to lead to a slow revival of the retail sector, particularly given the relative shortage of prime retail space available.

Overall therefore, we are likely to see a short term decline in both commercial office and retail development and construction but, I anticipate that following two years of consolidation, activity will pick up in 2010 in both the office and retail sectors.