Commercial property values fall

The adverse effects of the credit crunch on property values is spreading from Europe and the US to the rest of the world and reports over the past month can only be described as gloomy. Financial turmoil has sent demand for retail and industrial sites almost everywhere into decline, according to the first global commercial property survey by the Royal Institution of Chartered Surveyors (RICS).

According to the City Corporation, seven million sq ft of building is under construction in London, about 8% of its total office space. This does not include some large schemes yet to start. This expansion coincides with the worst downturn in a decade and a half for city financial institutions. (The Times, 31 May 2008)

A veteran property man, Chris Bartram thinks that the City is seriously over-supplied with offices. However, he is not expecting the market to go into freefall. Mr Bartram believes developers will hold their nerve and scale back or delay some very big schemes. They will use the downturn to move tenants from less appealing premises to other buildings and renovate the resulting vacancies before any upturn. He said: 'In the City there's going to be at least a 40% fall in rents from their peakBecause speculative development is in the hands of groups with very deep pockets – for example, Land Securities, Hammerson, one or two big funds – it's not in their interest to dump it.' (The Times, 31 May 2008).

Two weeks ago, it was reported that Land Securities, Britain's largest commercial property company, had written down the value of its shops and offices by £1.28 billion. This is the largest and steepest decline in the value of the company's buildings over such a short period, worse even than at the height of the 1990s recession. (The Times, 15 May 2008)

A report a week later noted that British Land had also written down the value of its shops and offices by £1.9 billion. British Land's 10.8% holding in Canary Wharf was hit hardest, marked down 'for accounting purposes' by 27.5% to £185 million over its financial year to 31 March. (The Times, 21 May 2008)

See The Times 100 case study on Land Securities. This focuses on Land Securities' business strategy. It describes how the company uses planning processes to provide a clear direction for the organisation. Land Securities has a rolling five-year plan that helps it look forward in order to meet its customers' future needs.


The Times Online – Property expert Chris Bartram says investors should sit tight on their City office space, 31 May 2008

The Times Online – Canary Wharf likely to acquire markdown, 21 May 2008

The Times Online – Land Securities writes down assets by £1.28bn, 15 May 2008

The Times 100 Case Studies – Land Securities, Using strategy and planning to measure, monitor and report performance

Potential Questions:

  • Give two examples of 'macro-economic factors' affecting the national economy at the present time.
  • What are the phases of the business cycle?
  • What usually happens to interest rates in periods of recession and slump and why?
  • How might a company like Land Securities meet the challenges of this type of economic change?