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commercial slump

Silhouetted workers walk in front of office towers in the Canary Wharf financial district in London.Luke Macgregor/Reuters

British commercial property is suffering its deepest downturn since records began after uncertainty surrounding the euro-zone crisis pushed values down for the second consecutive quarter and more pain looms on the horizon, data showed.

Investment Property Databank (IPD) said the value of shops, offices and warehouses fell 0.7 per cent during the first quarter of 2012, following a 0.1 per cent decline in the previous period and were 31 per cent below the last peak in September of 2007.

The slump is twice as severe as during the previous recession of the late 1980s when values recovered to 15 per cent below their pre-crash levels within five years and is the worst downturn since Britain's benchmark index began in 1971.

"The U.K. has fallen back into technical recession largely due to a lack of business demand and a construction slump. As property values continue to decline, investors are unlikely to want to develop, which will lead to further pain," IPD's director of research Malcolm Frodsham said.

Britain fell into its second recession since the financial crisis at the start of 2012, hit by headwinds from the euro-zone sovereign debt crisis, public spending cuts and high inflation which have curbed the country's efforts to boost economic output.

The only area where values are above 2007 levels is retail property in the West End district of London, where shoppers from emerging markets such as Russia and China are spending money in the stores of Oxford Street and Bond Street and helped to cause a 4 per cent rise in values.

Values in the next best sector of West End offices, the world's second most expensive office market after Hong Kong, were 16 per cent below the 2007 peak. The worst performing area was North West offices, which was 46 per cent lower.

It reflects the growing polarization between the rest of Britain and London, which has been buoyed by strong safe haven demand from international investors, particularly for residential property, which is not included in the IPD figures.

The gap between values for prime real estate and riskier secondary assets located outside the best locations or with less creditworthy tenants was at its widest since the early 1990s, IPD said, as investors remained unnerved by the wider economic uncertainty.

Depressed property values will also pile further pressure on those looking to refinance loans that are in negative equity as banks reel back lending to the real estate sector to meet stringent capital requirements, IPD said.