Home News Crumbling commercial property valuations and sales signal looming slump

Crumbling commercial property valuations and sales signal looming slump

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UK commercial property market valuations have fallen at their fastest pace since the Brexit vote, an early sign that higher interest rates could lead the market into a prolonged recession.

UK commercial property prices fell 2.6% last month, the biggest monthly drop since July 2016, according to index provider MSCI.

“It’s a pretty pessimistic outlook. There’s clearly a lot of uncertainty in the market right now,” said Tom Leahy, MSCI’s head of real asset research in Europe, the Middle East and Asia.

The outlook is similar across much of Europe, as investors pulled out after a rapid trade earlier in the year. In his first nine months of 2022, his record €229 billion deal has been completed. But over the past three months, the level has fallen 16% from the same period last year, according to property firm CBRE.

Rising interest rates and rising risks in the economy have rapidly changed the outlook for European property owners.

Borrowing costs – a function of central bank interest rates and lenders’ perceptions of sector risk – have risen sharply over the past six months, with inflation pushing up construction costs.

As bond yields rise, so does the appeal of real estate. If high levels persist, commercial real estate yields (moving in the opposite direction of prices) will need to increase significantly to keep investors back.

A real estate director at a major bank said, “Who would bother buying commercial real estate when the virgin land remains above 5%?” In some sectors, real estate yields have dropped to he 3%.

Leahy expected the unwinding of almost 15 years of ultra-low interest rates to cause a decline in commercial real estate prices across Europe.

He warned that the UK could be particularly vulnerable to recession as a result of recent political turmoil. A second Conservative prime minister is to be elected.

“The concept of Britain as a safe haven is under serious pressure because of our politics,” Leahy said, adding that political stability “has been in our favor for a long time. It was popular for that reason during the financial crisis.It just feels like the ship is drifting a bit.”

Property brokers and investors said the UK commercial property market had peaked at the end of the year.

According to CBRE, investment has fallen for three consecutive quarters. The number of pending deals tracked by MSCI is at its lowest level since 2013, suggesting the market is likely to slow further.

Earlier in the year, before the war in Ukraine and rampant inflation led to a flurry of rate hikes, the deal was heavily discounted to what raters thought was realistic.

The biggest deal in recent months was Landsec’s sale of 21 Moorfields, Deutsche Bank’s new City of London office.

Late last year, Landsec was approached privately by potential investors willing to pay around £1 billion, people familiar with the proposal said.

Landsec instead opted for the open sale process and settled for nearly 20% less last month. £809 million Contract with Australian developer Lendlease.

Analysts and investors said property Owners in Northern Europe, especially Germany and Northern Europe, were also hit by the recession.

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