Tim Crossley-Smith, head of London valuation, GVA Grimley
While the market had been expecting a correction for some time, views were split over whether this would be a short, sharp process or a prolonged and gradual slowdown. The experience of the past few months points to a more rapid adjustment in pricing, reinforcing our view of the market stabilising in early to mid-2008.
The effect on the commercial property market of the financial turbulence stemming from the US sub-prime problem is hard to predict, as sentiment is such a key factor.
Occupier demand in the retail and industrial sectors and in the regional office sector should only be slightly affected by recent financial market events, but will be affected by the general slowdown in the UK economy next year. However, the credit squeeze and higher risk premiums resulting from the sub-prime problems must also affect the property investment market, and will coincide with a slowdown that has been under way for some months.
The negative yield gap between property yields and long-dated gilts and 5-year swaps that has emerged over the past 12 months suggests that the investment market had become overheated. A gradual slowdown has in fact been evident since mid-2006, when returns peaked. The recent financial market problems will exacerbate the slowdown, as higher risk premiums are likely for all property but particularly for secondary property.
For example, for the funds that GVA Grimley values on a quarterly basis, a fall in capital value of 3-5% has been reported for the third quarter, with the secondary retail, industrial and speculative distribution sectors being the worst affected. We are expecting a similar movement in the final quarter, but greater stability in the first quarter of next year.
Impact on major occupiers
What is clear from our third-quarter figures is that there will be divergence between sectors and locations, with central London, at present, being relatively protected from the current trauma affecting the secondary regional markets. The biggest unknown here is the impact of the global credit crunch on major occupiers in the City and Canary Wharf.
With the influence that the London market has on the main property indices, any major shift in space requirements in the capital will have an exponential impact on the overall performance of the property market over the next 9-12 months.
