Commercial property enters ice age

Investors in the UK’s commercial property market should brace themselves for the worst, as sector predictions indicate that the already substantial losses seen will continue into 2009 and most markers point to a further ten per cent fall before January.

Two of the biggest commercial property funds – Norwich Union Property and Scottish Widows Investment Partnership Property – have performed poorly and left their investors badly out of pocket over the past 12 months. Norwich Union’s property fund, with some £2.5 billion under management, has plummeted by the best part of 23 per cent, while the Scottish Widows property fund has fallen by almost 18 per cent.

In 2005/06, private investors poured more than £4 billion into commercial property funds – money that was used to buy office blocks, shopping malls and other commercial properties. The credit crunch and the resulting combination of lack of liquidity in the banking system, the fall-off in demand and the severe problems affecting the retail sector have combined to freeze this recently buoyant market.

The results are obvious and widespread, with Michael Barrie of Legal & General’s £234 million property fund warning that the market will hit the floor this year. The signs are becoming clearer as the market loses value, down by 2.6 per cent in March and by 5.2 per cent in June.

Moreover, DTZ, one of the world’s largest commercial property agencies, has recently issued a profit warning and announced that almost three per cent of its UK staff will be made redundant.