Posted by: davidgarnerconsulting | September 10, 2009

The Commercial Property Slump – A Global Issue?

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You can’t really open the front door, pick up a newspaper or turn on the TV without learning that property markets all over the world are suffering.

In Japan, land prices are 58.5% below their 1991 peak and commercial property prices are 73% down too. The question is, and it’s quite an important question for my clients; does the same fate await all property investors?

After the dotcom crash, and the heavy losses that came with it, many large institutional investors made the move into commercial property, potentially lowering risk and providing diversification, and, for the most part, that turned out to be a very sensible move. Cheap borrowing and strong economies pushed up both capital values and rental yields. But in times of recession, commercial property was not left unscarred and has suffered losses like most asset classes.

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A good example is the $1.3 Billion John Hancock Tower in Boston, or at least it was $1.3 Billion in 2006, in fact it has just sold for $660 Million. In the U.S. commercial property indices have fallen by 30%, and could continue to 50% losses before the end of the crisis, says Ray Torto, chief economist of property services firm CB Richard Ellis on

The worst may yet be to come. And the real problem is refinancing debt. There are lots of big loans out there that will need refinancing very soon and the value of the underlying real estate is well below that of the borrowing, this means there will be plenty of very large finance deals unable to make payments and will go into default.

This is going to be a problem for U.S. Banks, many already having gone bust from their exposure to the residential mortgage market; those that escaped will find this hard because of their exposure to commercial property.

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But the problem is global. France and Germany have seen only minor adjustments in rents and prices, but in Spain and Ireland vacancies are rising fast, prices are falling and constructions has all but ceased.

Moscow rents are down 63% and 20% of space is empty. In Asia rents have fallen by 30% to 50% in commercial centres like Singapore, Hong Kong, Mumbai and Shanghai. There is also a lot of new supply coming ion to the market, making a quick recovery less likely.

Investors are feeling the pinch almost everywhere, despite record low interest rates, reports the Royal Institution of Chartered Surveyors. More than three-quarters of the 27 countries in its quarterly survey reported a rise in distressed sales.

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There are some positives, like in Hong Kong, where Hysan Development reported stronger rental income in its latest results. In Britain, “transactions now seem to have found a floor”, says Kelvin Davidson of Capital Economics; after plunging from a peak of around £6bn per month in late 2007, they’ve stabilised, albeit at a historically low £1.4bn per month.

In July, Tesco and Land Securities issued commercial mortgage backed securities (bonds secured against the cash flows from properties), the first such deals since 2007. But investors shouldn’t get too excited, as Japan can testify; downturns in this market tend to last for years rather than months.

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