Office prices still to hit rock bottom

Published on Saturday 20 September 2008 14:54

COMMERCIAL property prices need to fall a further 10% before buyers are tempted back to the market, consultants are warning.

The latest figures show commercial property was the worst performing asset class between September 2007 and 2008, with returns down 16.9% compared to -8.7% from the equities market and a positive return of 8.4% for gilts.

Consultants say the market will have to undergo a further dramatic re-pricing, of at least another 10%, before buyers will feel secure enough to return to the investment market.

Leading property consultants including CB Richard Ellis report there are plenty of buyers "awash with cash" poised to swoop on properties, but there are concerns that prices have not reached their nadir and investors are not yet willing to risk their capital.

Values have tumbled by 21.7% since June last year and according to Douglas Smith, Scottish chairman of CB Richard Ellis, a further serious market correction can be expected in the coming months.

Although investors who rely on debt to finance their deals are unlikely to return until financial markets stabilise, which may not be until 2010, Smith says there is no shortage of cash and equity in the market and those buyers are simply biding their time.

"There's a lack of credit, not a lack of cash," he said. "We are working with clients awash with cash who are saying they are ready to come into the market. But there are probably still further pricing adjustments to come.

"We are at a point where the old has finished but the new has not yet begun."

Alasdair Humphrey, who will take over as managing director for Jones Lang LaSalle from January, said "opportunity" or "recovery" funds, set up specifically to exploit the falling market, are likely to lead the charge.

"We are near a point where the value is somewhere near the bottom of the market," he said. "I think as we end this year and go into next year, we'll see more activity from that sector for sure."

UK investment trust Land Securities has set up a 500m opportunity fund while several US, Australian and Middle Eastern investors are understood to have built up similar large cash reserves to take advantage of the struggling UK market.

But according to property consultants Drivas Jonas, their activity has so far been muted as they wait for prices to drop even further.

"So far recovery funds have received plenty of press but have not yet accumulated property assets at any meaningful rate," Anthony Duggan of Drivas Jonas writes in a research paper to be published tomorrow.

Bill Colville, chairman of DTZ in Scotland, warned that given last week's events in the financial markets, full confidence is unlikely to return to the market for another 12 to 18 months. "Clearly a lot of people are taking stock of the situation right now," he said.

However, consultants say there are brighter prospects for the office rental market, particularly in Scotland. Limited office space in Glasgow is expected to result in some firms paying a record 28.50 per square foot in the city centre.

In Edinburgh, rents are forecast to hit 30 per square foot although fears are growing that the capital may soon have an oversupply of office space if Lloyds decides to shelve many of the current HBOS and Lloyds TSB offices after last week's 12bn takeover.

But Humphrey of Jones Lang LaSalle says if the office market continues to hold up, it could push the rest of the market out of the slump as investors realise there is still money to be made from offices in prime city centre locations. "From the office occupational side, the agency world here continues to be impressed with the position and take-up that continues," he said.

Humphrey said that in the first half of this year, JLL saw 113 deals compared to 2,008 in the first half of 2007, although the average size of deals was lower.