The euro zone sovereign debt crisis and a weak British economy dealt a double blow to the country’s commercial property market on Monday, derailing a major London scheme and curbing growth prospects.
The first setback came when developer Hammerson said a major scheme in the City financial district faced delay after law firm CMS Cameron McKenna pulled out of talks to pre-let a third of the 600,000 square feet, $741-million (U.S.) project.
“If this means Cameron McKenna are definitely out of the market rather than going somewhere else, it doesn’t bode well for City tenant demand this year,” said Alan Carter, an analyst at Investec.
Later in the day, data from researcher Investment Property Databank (IPD), the benchmark index for British property, showed values weakened in 2011 and the outlook for 2012 was “less than ideal.”
The central London commercial property market, which rallied strongly against the rest of the country between summer 2009 and autumn 2011, is now starting to feel the effects of economic uncertainty.
London developers are looking to exploit a shortage of top-quality offices in the City district but have struggled to attract tenants amid the global financial turmoil.
Five central London skyscrapers being developed by firms including Land Securities and British Land have only signed one office pre-let deal between them.
Wealth manager Schroders recently shelved a deal to move into the Walbrook building near the Bank of England at the 11th hour due to the uncertain economic outlook.
Growth in real estate values across the country slowed to 1.2 per cent last year, led by a fall in retail property, a sector hit by Britain’s faltering economy and the prospect it will enter recession in 2012. It compares with growth of 6.9 per cent in 2010.
IPD, which surveyed 3,595 properties worth $51.36-billion at end-December, said on Monday the commercial property sector returned 8.1 per cent in 2011, compared with 14.5 per cent in 2010.
Rental growth accounted for 6.8 per cent of that, down from 7.1 per cent.
The retail sector was the hardest hit in the last three months of 2011, with values falling 0.3 per cent, while warehouse and industrial values fell 0.2 per cent. Office growth remained positive at 0.2 per cent.
“The outlook for 2012 is less than ideal,” IPD’s U.K. and Ireland managing director, Phil Tily, said.
He added 2012 would be a year “of re-evaluation in regards to pricing levels, and a heavy concentration on income.”
In November, IPD said British commercial property values fell for the first time in almost two and a half years, possibly signalling an inflection point in the market.