Commercial property suffers in downturn around the world

19 November 2008

The property market in India has been hard hit by the global economic downturn but China is showing more resilience says RICS Global Commercial Property Survey.

India has experienced a significant commercial property downturn in Q3 2008. Rising interest rates, higher inflation and a continuing lack of liquidity is impacting significantly on business confidence. 45 percent more Chartered Surveyors reported a fall in occupier demand compared to just 6 percent in the last quarter. The balance of surveyors reporting investor purchases plummeted from a flat zero balance to -73. However, commercial property in China has, to date, remained relatively firm in the face of a global economic downturn. Most of the Chinese indicators remain in positive territory, with both supply and demand holding up and expectations generally upbeat. 14 percent more Chartered Surveyors expect an increase in floor space to be let and sold throughout China in the coming months while 18 percent more surveyors are reporting a rise in capital values

Emerging Europe witnessed the biggest slump in capital values out of all regions with 46 percent more Chartered Surveyors reporting a fall than a rise compared to 1 percent reporting a rise in Q2. Around 80 percent of the banking sector is owned by Western European banks and the supply of foreign currency lending to local subsidiaries has been severely restricted. 56 more Chartered Surveyors recorded a fall than a rise in investment demand compared to 9 percent in Q2. The hardest hit country is Russia with the net balance of surveyors reporting falls in investment demand jumping from a positive 16 percent to -79.

In the UK, the ongoing drag from the credit crunch continues to depress sentiment - especially in the Central London Office market where recent worry over the health of the hedge fund industry is only adding to a sense of pessimism. This is in stark contrast with Germany where demand and confidence is still high despite dropping capital values. In Germany the net balance of Chartered Surveyors reporting a rise than a fall in tenant demand is currently at 18 percent compared to a depressed -52 percent in the UK.

There is little good news from the US where the property market continues to suffer from a lack of liquidity. The proportion of surveyors reporting falls in pipeline developments has jumped from 48 percent to 79 percent.

“The worsening economic climate is taking its toll on the commercial property markets in most parts of the world and the credit crunch has now extended its grip into emerging markets. Large interest rate cuts by central banks should eventually provide some support. However, with liquidity still tight and tenant demand softening further pressure on the commercial sector is inevitable in the near term.”

Earlier in November the RICS Commercial Property Survey reported that the balance of surveyors said demand for commercial property in Q3 has fallen at the fastest pace in a decade. 52 percent more Chartered Surveyors reported a fall than a rise in demand compared to 50 percent in Q2 2008. All sectors remain firmly in negative territory for the fourth consecutive quarter with the industrial and office sectors dropping to the lowest balance in the survey’s history. The worst hit area continues to be the retail sector with 59 percent more Chartered Surveyors reporting a fall than a rise in retail demand, a slight improvement from 63 percent in Q1. The continuing financial turmoil and a slowing housing market is clearly weighing upon both retailer and consumer confidence.

The net balance of surveyors reporting new occupier enquiries in Q3 declined at the fastest pace in the survey’s history. Financial uncertainty has impacted upon decision making in the business community with many re-evaluating their demand for commercial property space. 54 percent more Chartered Surveyors reported a fall than a rise in new enquires for business space compared to 53 percent in Q2.

The supply side of the market is still loose with all three sectors feeling the depressing effects of the continuing climate of financial uncertainty. The amount of available floor space increased at the fastest pace in the survey’s history with the retail sector leading the way. 33 percent more Chartered Surveyors reported a rise in available floor space compared to 27 percent in Q2.

The value of inducements rose at the fastest pace in the survey’s history (a lead indicator of falling rents) as landlords tried to counter falling demand with incentives. In fact, confidence towards the rental outlook fell to the lowest level since the survey began in 1998 with the greatest pessimism in Central London. Meanwhile, confidence in activity is close to record lows and going into the Christmas trading period the retail sector is expected to be the worst performer.

Commenting, Oliver Gilmartin, RICS senior economist said: “The ongoing drag from the credit crunch is permeating through rental sentiment across all regions and sectors, especially in the Central London Office market where recent worry over the health of the hedge fund industry is only adding to the sense of pessimism. The intensification in credit strains following the collapse of Lehman brothers will undoubtedly further dampen investment and occupier demand heading into the fourth quarter.

“The opening of the Westfield shopping centre in Shepherd’s Bush arrives at a time when retailers are bracing themselves for what could be a torrid Christmas trading period, with retail lettings activity expected to suffer in the coming quarter.”