Values plummet as lending collapses

HUNDREDS OF millions of pounds have been pulled from commercial property investments and developments in the UK in the past few weeks, exacerbating already accelerating losses in real estate values across the country.

Autumn is traditionally the time when property activity picks up from the summer recess, but the struggling sector has slowed further as the funding market almost entirely closed for new transactions. Investors hope that after the UK government's bail-out of the banking sector, much needed liquidity will also trickle into commercial property, with some already pointing to improvements in the interbank lending rate.

But investors seeking finance for property deals have said that the few open doors have slammed shut recently following problems at some of the sector's largest lenders. The property industry has been built on cheap debt and high gearing levels, and analysts warn of a wounding period of de-leveraging made worse by the billions of pounds of property and debt that banks need to sell.

Some analysts forecasted a "double dip" property downturn six months ago as falling rents from office and retail occupiers began to accentuate already dropping prices. This is now a reality.

According to CB Richard Ellis, the capital decline in Q3 rose from 3 per cent in Q2 to 6.7 per cent. September recorded the largest fall in capital values so far in 2008 at 2.9 per cent, according to IPD, taking the total pricing correction to about 24 per cent in the past year. Property Data reports that transactions fell to £4.3bn (€5.5bn) in Q3, a quarter of the £16.4bn (€21bn) sold in Q3 2007.

James Beckham, head of City investment at agent King Sturge, said transactions had fallen to historically low levels following the collapse of a number of deals in the Square Mile. These included the £180m (€230.7m) sale of ING Real Estate's 88 Wood Street to German fund SEB and the £150m (€192m) acquisition of UBS's 18,581sq m (200,000sq ft) Milton Gate by Signa Deutschland.

Investors report that banks are reducing lines of credit and pulling blind pools of funding where possible. Last week, HBOS Corporate cancelled a £200m (€256m) facility with fund manager AAIM, effectively halting investment activity until a replacement backer can be found.

Martin Allen, property analyst at Morgan Stanley, said the lack of new debt for investment could cause the value of institutional grade UK commercial property to fall a further 23 per cent and secondary quality property to fall an extra 29 per cent. Property entrepreneur Nick Leslau, who runs investment firm Prestbury, said: "Without banking support there is almost no property market."

Duncan Owen, chief executive of Invista Real Estate, the fund manager that is 55 per cent owned by HBOS, said the UK market was virtually paralysed: "There isn't enough equity in the world being deployed to fund the great de-leverage at current values and that means that prices will keep coming down."

- (Financial Times service)