Commercial property research and viewpoints

Eurozone crisis’ impact on the commercial property market

20/07/2012

Tom Leahy

The immediate fears concerning Greece, Spain and the future of the Eurozone, which are the greatest threat to the UK economy, have dissipated over the last month.

Imbalance in Eurozone still not addressed

The combination of an agreement concerning the recapitalisation of the Spanish banks, the use of monies from the Eurozone Stability Mechanism to buys bonds on the secondary markets, and the onset of the summer holidays means that the issues in the Eurozone have slipped away from the front pages. But there is still no long term solution in place to solve the imbalances in the monetary union and the end is not yet in sight.

Inflation and unemployment dropped

In the meantime the news for the UK economy has been mixed.  On the plus side, inflation has dropped to 2.4%, its lowest level since 2009, and unemployment fell by 0.2% to 8.1% in the three months to May. However, other recent announcements and survey results have been disappointing: most forecasters expect the Q2 GDP figure to be negative and the IMF have downgraded their 2012 UK GDP forecast to just 0.2%, one notch above the Oxford Economics estimate of 0.1%.

Another round of quantitative easing

In response to the weakening outlook, the Government and Bank of England have announced a number of measures to boost liquidity and improve credit availability. Another round of quantitative easing, totalling £50bn, was announced after July’s MPC meeting, which comes alongside an £80bn ‘funding for lending’ scheme and a £5bn emergency liquidity scheme. These measures should take effect in the second half of the year, with the UK economy emerging from recession, before 2013 when, in relative terms, the GDP forecast is much more positive.

Property investors still risk averse

Our latest UK Investment Transactions report shows that property investment volumes increased by 14%, to £7.83bn, between Q1 and Q2 2012. While this £1bn increase was against expectations given the state of the economy, the trends that have characterised the investment market for the last 12-18 months remain the same: risk aversion; relatively low investment volumes; overseas money dominating; and a focus on London.

Foreign investors dominate Central London

With low growth to persevere until the end of 2012 and a lack of debt for property investors, it is likely these trends will remain in place for at least another six to nine months. And with reports of new overseas money entering the market, foreign investors have not yet satisfied their requirements for prime Central London property. Mirroring the investment market, the Central London occupier market is still outperforming that in the rest of the country. The IPD monthly indices show that office rents in the City and West End are still increasing, which is in sharp contrast to the regional office market, where the trend is one of decline.

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