The market crashed – but is the next commercial property bubble building?

Published 06th Oct 2009

Signs that banks are beginning to open their doors to commercial property companies and a rise in demand from foreign investors for offices in Central London have prompted claims that the next bubble in values may already be forming.

Figures released yesterday show that investment in commercial property in London grew in the three months to the end of September for the second consecutive quarter — the first time that the capital has recorded two consecutive quarters of investment growth since mid-2007.

Cushman & Wakefield, the property consultancy, said that investment in Central London, which includes the West End, the City and Docklands, rose more than 12 per cent in the third quarter to £1.6 billion.

A spokesman for Cushman said: “The dominant buyers continue to be overseas investors attracted by the weak pound and the very attractive returns achievable resulting from London’s relatively rapid price correction compared with other markets across the world.”

The market received a boost from the Libyan Investment Authority, which paid £155 million for Portman House in the West End in July, and the recent sale of a 50 per cent stake in British Land’s Broadgate development to Blackstone, the American private equity group, for just over £1 billion.

Separate research from Savills shows that the number of banks willing to lend to commercial property developers has almost doubled in the past six months. In March, the group said that there were only 12 lenders willing to lend more than £20 million per transaction to property companies.

The property consultancy said there were now 23 lenders that would lend more than £20 million, with six, including Eurohypo and Barclays, prepared to offer more than £100 million to back some deals.

Mike Prew, the respected Nomura analyst, said that an increase in the availability of bank lending could lead to another bubble. “The sector bears need to learn the lesson of this bubble, because the next one may already be forming,’’ he said.

“The action of the banks will create another bubble. Real estate has recovered extremely quickly. Some investors are buying commercial property on the expectation of inflated values in the next couple of years.”

Savills said that the turnaround in access to finance was “significant” and reflected the stabilisation of financial markets, but it added that lenders were still cautious. Property companies are more likely to secure loans from German banks, such as Landesbank Berlin or Deutsche Postbank, although British banks, including Barclays and HSBC, are also lending.

Evidence that property companies continue to suffer from the steep declines in their portfolios emerged yesterday as Minerva, which owns large developments in Central London, reported a £289 million after-tax loss in the 12 months to the end of June. It said that the value of its properties had fallen by 28 per cent over the period.

Meanwhile, London & Stamford, the property investment company, said that occupational conditions were at their worst since the 1970s as a result of tenant voids and lower rents.

Nomura said that rents for prime City offices had fallen by 30 per cent Savills said that the price of residential development land, which tumbled by more than 50 per cent since the September 2007 peak, had begun to follow the rise in house prices and was up by 3.6 per cent in the three months to the end of September.

Source: ' Times '

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