UK commercial property market recovery unsustainable, says influential financial services firm

Commercial property prices rose 3% in December, their highest monthly rise in 23 years, but this is unsustainable according to the report from Ernst & Young’s ITEM Club. It says the   chances of a sustained recovery in 2010 and beyond are unlikely as fresh mortgage defaults and the painful withdrawal of economic stimulus will seriously dent the sector.
 
The financial services firm believes that December’s record rise in average values was driven primarily by the Bank of England’s aggressive Quantitative Easing programme which is likely to end soon, possibly this month, and this will stop the supply of credit that is pushing the market upwards.
 
Also it points out that the recovery has followed a 44% slump in the previous 24 months and the lack of demand for new space from businesses that exacerbated the fall has not been resolved, meaning economic fundamentals are not underpinning the recovery.
 
The improvement in capital values has been driven by a wave of cash from domestic and overseas investors encouraged by low interest rates, the weak pound and historically low prices that have been targeting property acquisitions in the UK.
 
‘Welcome though the bounce of activity has been, its sustainability is far from certain. The upturn has largely been based on investors deciding the bottom of the market had been reached,’ said Dean Hodcroft, EMEIA head of real estate at Ernst & Young.
 
Andrew Goodwin, senior economic advisor to the firm’s Independent Treasury Economic Model Club, which produced the report, said banks were likely to lift volumes of repossessions this year as indebted companies firms struggled to refinance.
 
This, he said, would further damage banks’ balance sheets and impair their ability to lend.
Ernst & Young said the revival was also compromised by continued weakness in tenant demand and rental value declines, which could lead to more property companies and income-dependent landlords defaulting on their loans this year.
 
The volume of empty office space has been particularly severe in London, where there is a higher concentration of financial service sector jobs, the report said.
 
‘There is the threat of further regulation and a series of tax increases which may potentially damage the competitiveness of the capital and draw business towards other financial centres,’ Goodwin added.