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‘Perfect storm’ is forecast for commercial property

The environment for commercial property is now as bad as at the height of the crash of 1989, according to Close Investments managing director property Simon Cooke.

He says the market is facing a 20 per cent correction over the next 12 months, with the key City of London office sector to be among the worst hit.

Cooke says: “People are pulling out of transactions left, right and centre and the current environment is not any better than in September 1989. Even though the economic circumstances are different, in terms of volumes of business, zero is still zero.

“Capital values need to fall by 20 per cent because yields are at 5 per cent and need to move back to their historic average of 7 per cent.”

The benchmark IPD UK All Property index is up by 4.6 per cent, driven by an 8.1 per cent return from offices with retail and industrials broadly flat.

London makes up half of the office index and in turn a fifth of the whole index.

Franklin Templeton head of real estate Jack Foster warns that London is heading into “a perfect storm”. The combination of the credit crunch curbing corporate expansion, particularly among financials, a slowdown in transactions and oversupply will drive down returns, at least for 12 months.

He says: “The short-term prospects are the weakest they have been in five years but when the credit crunch works through, there could be fantastic opportunities, perhaps in 12 months.”

The credit crunch looks likely to cut off funding for many new developments, meaning that prime office space will be at a premium when the market normalises.

Norwich property trust assistant fund manager David Deimer says: “There has been a lot of turbulence recently but we have not seen any sales fall through.”

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