REIT Lose amid London Property Meltdown

Office space prices in London plummeted by 25% in August registering a dramatic plunge since 1992 as rental rates experienced its first decline in four years, according to Investment Property Databank, Ltd.

Rentals Plummet

CB Richard Ellis Group Inc. also estimated that rentals will further drop by 25% as the fiscal year ends.  The outlook is bleak for the commercial property market as Mike Prew, analyst of Lehman Brothers International, predicted that it will likely recover on 2013 at the earliest.  

Property stocks in UK also dropped by more than 50% since the introduction of real estate investment trusts in Britain in January 2007.  Martin Allen, analyst for Morgan Stanley said that shares my further fall to 23% at the end of 2009 as UK slides to deeper recession and values of property buildings significantly declines.

London Does Not Have Supply Problems

Patrick Summer, head of Real Estate Securities at Henderson Global Investors said that London does not have a supply problem.  Summer added that the troubles come from lack of demand as property tenants will forego big decisions until the market showed significant signs of improvement.

Prime properties have been developed this year totaling 4.2 million square feet.  This is the biggest development since 1991 when almost 6 million square feet were developed.  This year’s development crunch comes in the heels of financial crisis and slowing economic activity.  Prew predicts massive lay-off in London which could affect 20,000 city workers in three years.  There are reports that many firms lost and absorbed almost $500 billion writedowns resulting from the collapse of the US sub-prime market.

Abandoned Projects

The meltdown of the Real Estate market is the worst that ever hit London ever since Paul Reichmann lost a fortune in 1990 as creditors controlled Canary Wharf.  Prew asserts that market confidence is being shaken by the abandonment of development projects while sellers are shortchanged by incredibly low offers.

Scores of developers and real estate companies abandoned planned or ongoing projects.  British land postponed its 600,000 square feet construction project while JP Morgan Chase & Company abandoned its planned 1.5 million office tower project.

Meanwhile, Hammerson PLC sold Moorhouse at 15% below the actual value of the property according to Property Week Magazine.  Company insiders declined to comment on the deal.

Land Securities Group may delay its Walkie Talkie Tower project until it finds tenants for its building spaces.  Delaying projects may be resorted to if that would be the best option for companies, according to Francis Salway, Land Securities CEO.

Prew further assessed that the over-building initiatives are bringing the prices of real state down.  Property recession will probably hit London far worse than Canary Wharf.  The City has more empty spaces while tenants are looking to cut back on spending for spaces.