Buyers' strike brings down global commercial property

By Associate Editor David Stevenson Dec 24, 2008

David Stevenson

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It's been a dreadful year for commercial property investors. Not just here in Britian, but right around the globe. And the overall outlook for 2009 isn't looking any brighter – although there may be a small chink of light in the countryside.

The full-year returns for 2008 have yet to appear, but the writing's already on the wall. Values are well down, and last month's Global Commercial Property Survey from the Royal Institution of Chartered Surveyors (RICS) reported business demand weakening further in the third quarter, with "cracks now starting to appear across many emerging markets". That meant "the net balance for global rents has turned negative for the first time in the survey's history, led by particular weakness in India, Ireland, Japan, Spain and the US".

Basically, buyers have gone on strike. "Investment activity continued to slide with most regions seeing transactions decline," said the RICS, with "steep declines reported for the first time in emerging Europe and emerging Asia and across all sectors – office, retail and industrial." In Europe, CB Richard Ellis has just reported big Middle Eastern players being among the major culprits behind the downswing. 2008's first half saw €1.77bn (£1.67bn) of direct investment in Europe originating from the Middle East, which is a huge drop compared with total investments made between 2005 and 2007 of €5.84bn, €6.92bn and €5.83bn respectively.

Lower oil and share prices have hit the spending power of wealthy Middle Eastern investors and sovereign wealth funds (SWFs), says CBRE's Nick Axford, and "direct investment in European property from the Middle East and SWFs is now likely to be lower in the short-term than we had previously expected". Furthermore, the latest figures from Propertydata show that British institutions have continued making net property sales in the current quarter.

There's no sign of an upturn. Global rental growth forecasts "have been pared back sharply across all markets, with outright rent declines now anticipated in emerging Asia" – again a survey 'first', said the RICS report – "led by weaker office markets in India and China, while US expectations have also sunk to a new low".

In Britain, the picture seems particularly dire. "Capital values will fall a further 15% or so in 2009," says Kelvin Davidson at Capital Economics, as "the long and deep decline in office rents that we are forecasting right across the UK" is set off by soaring job cuts. Nor will the plummeting pound help. "Simply because the cost of investing in the UK has plunged doesn't mean that such an investment is a good idea." Indeed, says Davidson, the latest De Montfort University report on bank lending to commercial property "only adds to the gloom hanging over the sector" as "the reported rise in property loans in breach of financial covenants raises the risk of forced sales and a second-round knock to capital values". More forced selling equals more pain. And for more clues about what's in store next year, where better to look than the horse's mouth – an estate agent's own profit and loss account? Property group Savills, with more than 200 offices worldwide, has just issued its second profit warning in just two months. Now the firm's results for 2008 will be "significantly below the current range of analysts' forecasts" and the dividend policy will also be "considered".

What's going on? "While some deals are completing, we're not seeing the seasonal activity pick-up we've grown to expect," says CEO Jeremy Helsby. "Many pipeline transactions, which were at an advanced stage, have either been delayed or aren't proceeding." Buyers on the sidelines are waiting for values to fall further, and job cuts in Europe are likely early next year: "the question is when the bottom of the market is going to be, and we keep pushing that time period out".

In other words, don't get excited about a turnaround anytime soon. Indeed, it's hard to find any reasons to be cheerful. But for those prepared to get their feet dirty, there have been some recent rewards. "Buying agricultural land in the UK has been the 2008 success story," says Propertywire. Values ended the year up 21.5% on 2007, despite a fourth-quarter slide of 4.4%.

Could farmland yet prove an enduring safe haven in the downturn? Analysis by Savills going back to 1970 shows that agricultural land values consistently move less in line with the broader economy than with the price of wheat. And although this has been volatile this year, "our outlook for wheat is bullish for 2009", says Ian Bailey, head of rural research, "we therefore confidently expect agricultural land will be well placed to defy, in large part, the downward recessionary pressures".

Savills forecasts average agricultural land values remaining stable through 2009 as wheat prices rise and the second half brightens up – their worst-case scenario is a 5% drop. But there are still a couple of caveats. First, a two-tier market is likely to emerge. High-quality, well-located acreage, especially good commercial arable farmland, may hold its value well, but poor-quality land in inferior locations will be difficult to sell. Second, the recession's most likely to hit demand from so-called 'lifestyle' – ie, non-farming – buyers. They accounted for just under a quarter of all land purchases through 2008, down from a third in 2007. And as the crunch really starts to hit home, that's a trend very likely to continue in 2009.

Published in Property | More articles by David Stevenson

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